The Fed Is Setting The Stage For Hyper-Inflation Of The Dollar (#GotBitcoin?)
Policy makers have begun talking about letting the inflation rate rise above its 2% target. Look for a formal statement soon. The Fed Is Setting The Stage For Hyper-Inflation Of The Dollar (#GotBitcoin?)
The Fed’s traditional Phillips curve approach to forecasting inflation, which relies on the theory that inflation accelerates as unemployment falls, was widely criticized during the most recent economic recovery. Inflation remained quiescent in the wake of the Great Financial Crisis even as the unemployment rate fell to 3.5%, well below the 2012 high estimate of the natural rate, or 5.6%. The Fed’s commitment to Phillips curve-based inflation forecasts induced it to raise interest rates too early in the cycle and continue to boost rates into late 2018 even as faltering markets signaled the hikes had gone too far. The Fed was eventually forced to lower rates 75 basis points in 2019 to put a floor under the economy. Inflation remained stubbornly below the Fed’s 2% target throughout that period.
Faced now with the prospect of another prolonged period of low inflation, Fed officials are signaling they will place less emphasis on Phillips curve estimates when setting policy. Fed Governor Lael Brainard said this week that “with inflation exhibiting low sensitivity to labor market tightness, policy should not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence.”
No longer are estimates of longer-run unemployment taken as almost certainly indicating the economy is at full employment. Instead, Brainard said the Fed should focus on achieving “employment outcomes with the kind of breadth and depth that were only achieved late in the previous recovery.” The Fed is going to try to run the economy hot to push down unemployment.
By de-emphasizing the Philips curve, the Fed loses its primary inflation forecasting tool. Instead of an inflation forecast, the Fed will rely on actual inflation outcomes to determine the appropriate time to change policy. Brainard pointed out that “research suggests that refraining from liftoff until inflation reaches 2% could lead to some modest temporary overshooting, which would help offset the previous underperformance.”
Think about what she is saying. Traditionally, the Fed attempts to reach the inflation target from below, effectively using the unemployment rate to forecast inflation and then moderating growth such that projected inflation doesn’t exceed its target. Brainard is saying the Fed should not tighten policy until actual inflation reaches 2%. Policy lags — the time between the Fed’s actions and the resulting economic outcomes — mean inflation will subsequently rise above 2%. The Fed would thus overshoot the inflation target and then return to the target from above.
Federal Reserve Bank of Philadelphia President Patrick Harker goes even further in a Wall Street Journal interview, saying “I don’t see any need to act any time soon until we see substantial movement in inflation to our 2% target and ideally overshooting a bit.” Expect to see more Fed speakers also saying they want inflation at or above 2% before they tighten policy. Also expect to see something along these lines codified at in a policy statement.
This shift also has implications for the Fed’s ongoing review of policy, strategy, and communications. When Brainard talks about offsetting “previous underperformance,” she is giving a green light to a “make-up” strategy in which the Fed compensates for a period of below-target inflation with a period of above-target inflation. The Fed’s current policy does not allow for such a strategy. The broad willingness to accept overshooting implies that the Fed’s policy review will conclude with a shift toward some form of average inflation targeting in which the central bank explicitly sets policy to compensate for errors such that inflation averages 2% over time.
The implication for financial markets is that the Fed expects to hold policy very easy for a very long time. They will reinforce this stance with enhanced-forward guidance and, eventually, yield-curve control. As long as inflation remains below 2%, the Fed will push back on any ideas that they will tighten policy anytime soon. And even inflation above 2% wouldn’t guarantee tighter policy if the Fed concluded the overshoot was transitory. Don’t doubt the Fed’s resolve to keep policy accommodative. They will keep reminding you if you forget.
Fed’s Harker Backs Allowing Economy To Run Hot Before Raising Interest Rates
Philadelphia Fed president backs no interest rate hike until inflation moves above 2% annual inflation target.
Philadelphia Fed President Patrick Harker on Wednesday said he would support a change in monetary policy where the central bank would let the economy run hot until inflation rises above the central bank’s 2% annual target before raising borrowing costs.
“I’m supportive of the idea of letting inflation get above 2% before we take any action with respect to the federal funds rate,” Harker said, in an interview on Bloomberg Television.
Harker is a voting member of the Fed’s interest rate committee this year.
On Tuesday, Fed Governor Lael Brainard also backed the idea of letting inflation get over 2% before the Fed takes any action to raise interest rates. This promise is called “foward guidance” at the central bank. Typically, the Fed would hike rates preemptively if it saw inflation surging.
Former Fed staffer, and now Fed watcher, Krishna Guha said he saw support rising for this new policy and strengthened forward guidance and said it was good for investors who want to take risks.
“Harker’s comments suggest growing momentum behind this view at the U.S. central bank and should continue to support risk-appetite as investors look ahead to the coming Fed pivot to a new phase of monetary policy in which the FOMC will make longer range commitments on both rates and quantitative easing,” Guha, now the vice chairman of Evercore ISI, said in a note to his clients.
Harker said that controlling COVID-19 was critical to restoring the health of the economy. He said he was “a little skeptical” that the July employment report would be as strong as the prior two month’s reports given the resurgence of the virus in the South and West.
Harker said he was revising down his forecast for economic growth as a result of the spread of the coronavirus.
In a webcast speech later Wednesday to the Center City Proprietors Association, Harker said he expected a negative 20% growth rate in the first half of the year, followed by a 13% gain in the second half. The result would be minus 6% for the entire year.
“That’s a much sharper recession than we experienced during the financial crisis,” he said.
“This is going to be a slow recovery. Until we get the virus under control, we can’t get the economy back to full throttle,” he said.
What’s Behind The Fed’s New Push To Promote Inflation?
Why the Fed’s strategy on inflation is changing and why the definition used by America’s central bank may be hurting regular people.
Fed To Allow For Periods Where Inflation Runs Above The Central Bank’s 2% Target
Central bankers look to change long-running strategy to encourage lower rates, shift unemployment-inflation dynamic.
The Federal Reserve is preparing to effectively abandon its strategy of pre-emptively lifting interest rates to head off higher inflation, a practice it has followed for more than three decades.
Instead, Fed officials would take a more relaxed view by allowing for periods in which inflation would run slightly above the central bank’s 2% target, to make up for past episodes in which inflation ran below the target.
“It would be a significant change in terms of how they are thinking about” the trade-off between employment and inflation, said Jan Hatzius of Goldman Sachs. “A lot of those things look very different now from the way they looked a few years ago,” he said.
Fed Chairman Jerome Powell hinted at the shift at a news conference last week when he said the central bank would soon conclude a comprehensive review of its policy-making strategy that began last year.
Mr. Powell initiated the review with an eye toward beefing up the Fed’s ability to counteract downturns in a world where interest rates are lower and more likely to remain pinned at zero.
Even before the severe shock from the coronavirus pandemic, the Fed had grown concerned about spells of low inflation that have bedeviled authorities in Japan over the past two decades and in Europe for the past decade.
The change being contemplated now is a way of essentially telling markets that rates will stay low for a very long time. Markets have likely already picked up on this change, given the continued declines in long-term interest rates.
The changes on their own will do little to provide more support to the economy right now because investors already understand that the Fed isn’t likely to raise interest rates for years, said Steven Blitz, chief U.S. economist at research firm TS Lombard. “It is a change at this point without meaning. It’s just words,” he said.
The Fed would formally adopt changes by altering a statement of long-run goals that it approves annually, something it last did in January 2019. “The changes we’ll make…are really codifying the way we’re already acting with our policies,” Mr. Powell said last week.
One way for the Fed to do that would be to amend that document to say inflation should average 2% “over time.”
The virus shock led the Fed in March to rapidly slash short-term rates to zero, purchase trillions of dollars in government-backed debt and deploy an array of programs to backstop lending markets.
Because of the pandemic, Mr. Powell tabled discussions this spring over the framework review. The Fed resumed those discussions at their two-day meeting last week and could seek to conclude them as soon as their Sept. 15-16 meeting.
The Fed formally adopted the 2% inflation goal, a level it regards as consistent with healthy economic growth, in 2012. At the time, short-term rates also were pinned near zero. But central bankers, economists and investors still expected those rates to return to more normal levels of 4% or so once the economic expansion matured.
Even before the pandemic hit, those rates were stuck at much lower levels than 4% for reasons that weren’t expected to change soon, such as demographics, globalization, technology and other forces that have held down inflation.
The Fed justified pre-emptive rate increases because monetary policy works with a lag. “Now, you’re saying, ‘Yes, there may be lags behind, but we’re OK with an inflation overshoot because inflation has run so much below,’” said Priya Misra, an interest-rate strategist at TD Securities.
The Fed says its current 2% inflation target is symmetric, meaning officials are as uncomfortable with inflation somewhat below as somewhat above that level. In other words, 2% isn’t a ceiling. In addition, the Fed under this approach is always aiming for 2%, and it doesn’t take into account previous deviations.
The problem for some officials is that the results haven’t been symmetric; inflation has run at or under the target, but never above it.
The Fed’s misses on inflation over the past five years were relatively small. But some officials were concerned because if the Fed can’t meet its target after a long time, consumers and businesses could expect even lower inflation. Such expectations can become self-fulfilling, and officials would be alarmed if they were falling because of the important role expectations play in determining actual prices
In speeches over the past year, Fed governor Lael Brainard has called for shedding the current approach and taking up a way to make up for past misses of the target.
Last month, Ms. Brainard approvingly cited research that would have the Fed refrain from raising rates until inflation reached 2%, rather than initiating rate increases before achieving the target and on the basis of a forecast of higher inflation, as the Fed did in 2015.
Any changes the Fed makes would coincide with a deeper emphasis on the benefits of very low levels of unemployment. For years, officials were concerned that allowing unemployment to fall too low could generate undesirable levels of inflation, which occurred after the 1960s.
In the most recent expansion, however, officials were surprised to find unemployment falling to levels associated with higher prices, but without the anticipated inflation.
By raising rates based on a forecast of higher inflation, the Fed risks short-circuiting a labor-market expansion when many of the most disadvantaged workers are finally getting jobs or raises. That can be costly if inflation doesn’t materialize, said Atlanta Fed President Raphael Bostic on Twitter last month.
“This isn’t inflation for inflation’s sake,” said Mr. Bostic.
The changes under consideration “would be very meaningful because it would be memorializing their commitment to working toward a tighter labor market when the economic circumstances allow for it,” said Rep. Denny Heck (D., Wash.), who is on the House Financial Services Committee. “It would be a huge break from the past.”
BlockTower’s CIO Predicts Hyperinflation Could Send Bitcoin Parabolic
Ari Paul, CIO at BlockTower Capital crypto hedge fund, believes Bitcoin’s next parabolic move will soon be triggered by hyperinflation caused by central banks’ monetary policies.
Ari Paul, CIO and co-founder at crypto hedge fund BlockTower Capital, believes Bitcoin’s next parabolic move will soon be triggered by hyperinflation caused by the monetary policies of central banks.
According to Paul, the Federal Reserve will eventually need to devalue the dollar as a means to pay its increasingly high sovereign debt.
In that scenario, according to Paul, we’ll enter a period of hyperinflation similar to the Great Inflation in the 1970s. During such an event, investors could move their wealth away from dollars and Treasury bonds and into inflation-resistance assets.
“If we have a return to something like the 1970s, I think probably gold rallies five to 10X or more, I think Bitcoin probably rallies 10 to 30X or more”, he claimed.
Paul believes this process has already started and that we are already in an “inflationary market, a Bitcoin bull market and gold bull market in the early stages”.
He also said “Bitcoin is like a call on inflation,” meaning that as long as the expectation of high inflation remains high, the price of the call (Bitcoin) will also increase.
Global Recession Supercharges Federal Reserve As Backup Lender To The World
When the coronavirus halted the global economy, the U.S. central bank lent massively to foreign counterparts.
When the coronavirus brought the world economy to a halt in March, it fell to the U.S. Federal Reserve to keep the wheels of finance turning for businesses across America.
And when funds stopped flowing to many banks and companies outside America’s borders—from Japanese lenders making bets on U.S. corporate debt to Singapore traders needing U.S. dollars to pay for imports—the U.S. central bank stepped in again.
The Fed has long resisted becoming the world’s backup lender. But it shed reservations after the pandemic went global. During two critical mid-March weeks, it bought a record $450 billion in Treasurys from investors desperate to raise dollars. By April, the Fed had lent another nearly half a trillion dollars to counterparts overseas, representing most of the emergency lending it had extended to fight the coronavirus at the time.
The massive commitment was among the Fed’s most significant—and least noticed—expansions of power yet. It eased a global dollar shortage, helped halt a deep market selloff and continues to support global markets today. It established the Fed as global guarantor of dollar funding, cementing the U.S. currency’s role as the global financial system’s underpinning.
Just as the Fed expanded its role in the U.S. economy to an unprecedented degree during the 2008 financial maelstrom, it has in the coronavirus crisis expanded its power and influence globally.
“The Fed has vigorously embraced its role as a global lender of last resort in this episode,” said Nathan Sheets, a former Fed economist who was the Treasury Department’s top international deputy from 2014 to 2017 and now is chief economist at investment-advisory firm PGIM Fixed Income. “When the chips were down, U.S. authorities acted.”
The value of the dollar has tumbled in recent weeks against other currencies as investors grow more troubled about the economic outlook and difficulty containing the coronavirus. Still, it is trading near levels recorded before the pandemic hit this year and above its long-term average on a trade-weighted basis, said Mark Sobel, a former U.S. Treasury Department official now at the Official Monetary and Financial Institutions Forum, a London-based think tank.
Concerns that short-term declines in the dollar are an omen that its standing as the global reserve currency faces a threat are “vastly overdone,” he said.
The Fed supplied most of the money abroad via “U.S. dollar liquidity swap lines.” In essence, it lends dollars for fixed periods to foreign central banks and in return takes in their local currencies at market exchange rates. At the loans’ end, the Fed swaps back the currencies at the original exchange rate and collects interest.
By stabilizing foreign dollar markets, the Fed’s actions likely avoided even greater disruptions to foreign economies and to global markets. Those disruptions could spill back to the U.S. economy, pushing the value of the dollar higher against other currencies and damping U.S. exports—and the economy.
The risks to the Fed are minimal given that it is dealing with the most creditworthy nations and the most advanced central banks. But there are risks that investors come to expect a safety net for dollars that might lead to riskier borrowing during good times.
The Fed began deploying the swap facilities on March 15. By the end of March, it had expanded them to include 14 central banks while launching a separate program for those without swap lines to borrow dollars against their holdings of Treasurys. By May’s end, the total lent out under the programs peaked at $449 billion.
The Fed’s goal is to keep financial markets functioning, and the March events had the makings of a global panic with a resulting rush for cash. The aim was to prevent investors from dumping Treasurys and other dollar-denominated assets such as U.S. stocks and corporate securities to raise cash, which would have driven prices of those assets even lower.
Fed Chairman Jerome Powell in a May 13 webcast acknowledged the Fed’s global role more explicitly than his predecessors had during the last global financial crisis. The loans let foreign central banks supply dollars cheaply to their banking systems and stopped everyone in that chain from panic-selling assets like U.S. Treasurys to raise cash, he said: “It had a very constructive effect on calming down those markets and reducing the safety premium for owning U.S. dollars.”
Andrew Hauser, the Bank of England’s top markets official, in an early June speech said those swap lines “may be the most important part of the international financial stability safety net that few have ever heard of.”
On July 29, the Fed said it would extend the temporary programs, originally scheduled to end in September, through March 2021. “The crisis and the economic fallout from the pandemic are far from over,” Mr. Powell said, “and we’ll leave them in place until we’re confident that they’re no longer needed.”
The shift has brought little of the scrutiny the Fed saw during the 2008-2009 crisis. When Mr. Powell appeared before Congress for hearings in June, lawmakers didn’t ask a single question about the huge sums the central bank made available to borrowers abroad.
The Fed’s governing charter from Congress gives it the authority to operate the swap lines, which it has done in some form since 1962, when the Fed heavily debated whether it had the authority to conduct foreign-exchange operations. Congress could revoke these authorities if it didn’t approve of how the Fed was using them.
The swaps are structured so that the Fed’s foreign counterparts bear the risk of loans going bad or currency markets moving the wrong way. A large portion of the Fed’s overseas loans have recently been swapped back as markets around the world have recovered.
The Fed’s aggressive overseas lending has injected it into the world of foreign policy: Not every country gets equal access to the Fed’s dollars. Turkey, for example, has appealed unsuccessfully for dollar loans from the Fed to support its sinking currency, according to public comments made in April by the U.S. ambassador to Turkey, David Satterfield. A representative for the Turkish central bank didn’t respond to a request for comment.
Those decisions are based on creditworthiness, but political considerations could pose a threat to the Fed’s independence, said Mr. Sheets, the former Fed economist. When the Fed rolled out the lending program during the 2008 financial crisis, central-bank officials consulted with the leadership of the Treasury and State Department to make sure any operations were consistent with broader U.S. objectives, he said.
“The Fed was keenly aware of this tension that, yes, this was monetary policy, but it was abutting some broader issues that were not typically the Fed’s area,” said Mr. Sheets. Concerns that such lending programs could suck the Fed into broader foreign policy entanglements were a “meaningful constraint” on the expansion of the swap lines, he said.
The moves have also left the world ever more tied to a single country’s economic management and central bank. Efforts have persisted for years to dilute the dollar’s central role, via the euro, then the Chinese yuan. But knowing the Fed is willing to step in has led banks, businesses and investors to flock to the U.S. currency.
This gives the U.S. enormous power—to punish foreign banks for violations of U.S. sanctions, for instance, or to consider options like breaking the Hong Kong dollar’s peg to the dollar, something U.S. officials considered earlier in July, The Wall Street Journal reported, to punish China for its treatment of the city, before shelving the idea.
It also has produced a familiar cycle, said Stephen Jen, chief executive of Eurizon SLJ Capital Ltd. in London and a longtime currency analyst and money manager.
Investors value the dollar for its safety. But every time there is a major market stress there is a run to the currency, leading to breakdowns in the market, which forces the Fed to step in, which reinforces investors’ faith in the dollar, he said. “People have become more dependent on the dollar than any other currency,” he added.
The Fed pioneered the current version of central-bank swap lines in 2007, when rising U.S. subprime-mortgage delinquencies jolted short-term debt markets and made it hard for big European banks to borrow dollars. Initially, the Fed lent to some European banks’ U.S. subsidiaries. It later rolled out swap lines to two foreign central banks, allowing the Fed to lend dollars with less risk, and expanded them to a dozen others over 2008 and 2009.
The Fed activated some of the swaps again in 2010 and 2011, as Eurozone debt problems mounted, and set up standing facilities with five major central banks in 2013. One Fed bank president formally objected, saying that the swaps effectively let European banks borrow at lower rates than U.S. banks and that they were an inappropriate incursion into fiscal policy.
When coronavirus shutdowns hit the U.S. and Europe in March, oil prices plunged and stocks plummeted. Companies drew down bank credit lines, socking away dollars to pay workers and bills as revenue vanished. Financial markets showed alarming signs of dollar demand.
March 16, among the worst days in recent market history, brought the financial system to the brink. Stock prices plunged globally as investors scrambled to raise cash. Banks sharply increased the cost of lending dollars to each other. Foreign banks were forced to pay dearly, gumming up the flow of dollars to their customers.
In South Korea, big brokerages suddenly found themselves in need of large sums of dollars to meet margin calls, according to Tae Jong Ok, a Moody’s Investors Service analyst who covers financial institutions in the country.
They had previously borrowed money to buy billions of dollars of derivatives tied to stocks in the U.S., Europe and Hong Kong. When those stocks plunged, lenders demanded they put up more cash. The scramble for dollars helped push the Korean won to its lowest level in a decade on March 19.
Japanese banks suffered, too. Many had made loans directly to U.S. borrowers. The sector also owned more than $100 billion of collateralized loan obligations—bonds backed by bundles of loans to low-rated U.S. companies—that in some cases had been bought on short-term credit and needed to be regularly refinanced.
Insurers in Japan that had invested heavily in higher-yielding assets abroad also had difficulty securing dollars to fund their trades.
In Singapore, high borrowing costs affected the dollar supply to companies needing to pay off debt or import and export goods, according to bankers in the city-state. “There was a classic ‘dash for cash’ scenario,” said a representative of the Monetary Authority of Singapore, adding that dollar-market conditions became so strained there was indiscriminate asset-selling.
Central bankers from Singapore, South Korea, Australia and elsewhere swapped tales of the carnage on a regular call that included a representative of the Fed, according to people familiar with the calls.
As the crisis snowballed, the Fed increased purchases of Treasurys from $40 billion a day on March 16 to a record $75 billion days later. It also expanded the dollar swap lines to nine other countries. By March 31, the Fed had launched a new program that let some 170 central banks borrow dollars against their holdings of U.S. Treasurys.
The rollout was faster and broader than when the Fed tentatively introduced the swap lines during the financial crisis a decade earlier. Back then, “it was improvisation,” said Adam Tooze, a Columbia University history professor who writes about financial crises and war. “Today, it seems extremely deliberate.”
As financial markets recovered, dollar borrowing costs for many banks and companies outside the U.S. fell. The Fed’s outstanding currency swaps started receding in mid-June, as a wave of transactions matured and weren’t renewed, and fell further to $107.2 billion as of July 30.
The facility that lets central banks borrow against Treasury holdings hasn’t seen much use. Analysts said its presence alone helped stop the scramble for dollars.
While the Fed’s actions during the financial crisis sparked outrage—seen to be aiding firms that caused the crisis—there have been no concerns raised publicly by U.S. lawmakers or Fed officials about the Fed’s growing global role. “The whole pandemic is a different enemy,” said William Dudley, New York Fed president from 2009 to 2018. “The political support for the Fed to be aggressive is much broader this time.”
The Fed has had little choice but to intervene, given the dollar’s global centrality. Some 88% of the $6.6 trillion in currency trades that take place on average daily involve dollars, according to the Bank for International Settlements, or BIS. The dollar is also the most commonly used currency in cross-border-trade in commodities and other goods.
In addition, low American bond yields over the past decade prompted many big investors to send dollars to emerging markets. By the end of 2019, the volume of U.S. dollar-denominated international debt securities and cross-border loans reached $22.6 trillion, up from $16.5 trillion a decade earlier, according to BIS data.
Discontent about the dollar’s growing dominance has percolated for years, including among U.S. allies. Mark Carney, the Bank of England’s governor at the time, took aim at the dollar’s “destabilizing” role last August in a keynote speech at an annual central-bankers gathering in Jackson Hole, Wyo.
He argued the dollar’s growing role in international trade was out of step with America’s declining share of global output and exposed developing countries to damage from changes in U.S. economic conditions. He also outlined a proposal for central banks to create their own reserve currency.
The Trump administration’s use of tariffs and sanctions has spurred more countries to seek trading arrangements that bypass the dollar, but the efforts have had little effect.
One irony of the U.S. financial crisis was that the dollar’s use overseas only increased in its aftermath. One reason was the Fed: Its liberal lending during the crisis convinced investors that whatever happened, their access to dollars was more or less assured.
A decade ago, Jonathan Kirshner, a Boston College political science and international studies professor, predicted a decline in the dollar’s international role.
Its performance has been more robust than he anticipated, he said in a recent interview: “In the absence of viable alternatives, the dollar endures as the most important currency for the world.”
Why Cryptocurrency Is More Than A Hedge Against US Dollar Inflation
Precious metals used to be the best way to protect your portfolio from natural value deterioration, but Bitcoin is changing the game.
During times of international economic crisis, governments print money. This leads to inflation and investors subsequently stashing their investment capital in long-term, stable investments. Historically, that has meant gold, but in the current economic crisis, gold has been joined by another long-term store of value: Bitcoin (BTC).
There are several good reasons for this. The United States Federal Reserve is handling the crisis terribly, and has responded to soaring unemployment numbers in the same way they always do: by printing money. Already, the dollar has lost 5% of its value, with predictions that this is only the beginning. The currency is expected to shed up to 20% in the next few years, according to analysts at Goldman.
Alongside this devaluation has come another threat to investors: deflation. With the value of dollar assets dropping rapidly and the worst yet to come, investors are looking to Bitcoin as a hedge against deflation. This appears to be the primary reason why Bitcoin has retained its value despite woeful news in other parts of the economy.
Are these investors correct, though? Can cryptocurrency act as a hedge against the dollar’s inflation? Let’s dive into it.
Inflation And Deflation
For crypto investors accustomed to dealing with daily — or even hourly — market movements, it can sometimes be easy to forget about the macro-level trends that drive our economy. Inflation is one of these, and it’s useful to have a broad definition of the term before we look specifically at the role of crypto in beating it.
Essentially (and as you might remember from Economics 101), inflation generally comes about because of a general decrease in the purchasing power of fiat money. Many things can cause this loss of purchasing power: foreign investors pouring out of a particular currency, or even investors attacking a currency.
Most often, though, inflation is the result of an increase in money supply, like when the Fed unilaterally creates billions of dollars and sends out checks to millions of Americans, for instance.
Deflation is the opposite. In deflationary scenarios, prices decrease as fiat currency increases in value relative to different goods and services. Again, there can be different causes for this, but it generally comes about due to tightly controlled fiscal policies, or technological innovation.
The Global Pandemic And Inflation
The key point in these definitions is that inflation can only occur in fiat currencies — i.e., those not based on the market value of a tangible asset, but largely on confidence in growing gross domestic product. Since the Bretton Woods agreement of 1944, the latter has been the basis of the U.S. dollar’s value.
Having a fiat currency gives governments a powerful degree of freedom when it comes to printing money, and supposedly when it comes to controlling inflation. However, when confidence in the government is low (as it is now), government spending programs can lead to inflation quickly getting out of control. In the 1970s, gold boomed because investors saw it as a hedge against the dollar’s rapid inflation.
This is similar to what is happening now. The global COVID-19 pandemic has given rise to a massively inflationary monetary policy and aggressive expansion of money supply while prices in certain key areas such as food staples keep increasing due to supply shocks caused by lockdowns.
In this environment, it’s no surprise that gold is booming. There is, after all, only a limited supply of gold on earth, and so its price cannot easily be affected by government policy. Some crypto currencies, however, are also booming — apparently for the same reason. Billionaire investors are therefore lining up to compare Bitcoin to gold.
Bitcoin: A Deflationary Asset?
The reason why some forms of cryptocurrency can act as a hedge against inflation is precisely the same reason gold can: there is a limited supply. This is something that is often forgotten about by many, even those in the crypto space, but it’s worth remembering that many cryptocurrencies — and most notably, Bitcoin — are built with an inherent limit.
The 21 million Bitcoin limit means that at a certain point, there should be fewer Bitcoins versus the demand for them, meaning that in terms of value, the price per unit should increase as the supply decreases.
In addition, the fact that Bitcoin allows investors to limit their exposure to government surveillance networks means that, in this time of low confidence in government, many people are moving their investments away from the U.S. dollar and toward crypto in order to avoid inflation and government tomfoolery. In other words, the comparison with gold investments of previous crises seems pretty apt.
But here’s the thing: It’s not completely clear that Bitcoin is, in fact, a deflationary asset. Or at least, not yet. While it is technically true that the supply of the currency is limited, we are nowhere near that limit, with most estimates putting the last Bitcoin to be mined in 2140. What this means, in practice, is that Bitcoin will be unable to act as a completely stable hedge against inflation for at least another 120 years.
Flexibility And Stability
This might not matter that much, of course. One of the primary driving forces behind the rise of Bitcoin has been the combination of (relative) stability and (relative) variability that it affords. In this context, it’s heartening that investors now regard crypto as a stable hedge against an inflating U.S. dollar, but to regard crypto as merely a replacement for gold would be to miss the point: Cryptocurrency is far more than just a hedge.
It’s Time To Build Cash To Take Advantage of Stocks’ Coming Tumble
Summertime, and the livin’ is uneasy. Stocks are jumpin’ and the market is high. So, hush, all you skeptics, don’t you whine.
With apologies to the Gershwins and DuBose Heyward, this mangling of the lyrics of “Summertime” from Porgy and Bess seems appropriate, as the stock market’s benchmark, the S&P 500 index, is on the verge of reclaiming its record peak in this summer of our disquiet, if not discontent.
Stock market highs are associated with upbeat songs, such as Irving Berlin’s “Blue Skies,” to cite another tune from that bygone era. “Never saw the sun shining so bright, never saw things going so right,” went this popular 1929 ditty.
With the S&P 500 ending the week a fraction of a percent below its Feb. 19 high close of 3386.17, the disparity between the equity market and the real economy, which is struggling to cope with the coronavirus pandemic, remains stark.
As a measure of how far we’ve come, Thursday marked the 100th day since the S&P 500’s low of March 23, writes Ryan Detrick, chief market strategist of LPL Financial, in a research note. The 50%-plus rebound since then marks the best 100-day gain for the big-cap benchmark, “while millions of people have lost their jobs and tragically more than 160,000 Americans have lost their lives,” he adds.
In the past, large 100-day rallies usually were followed by continued gains, with stocks higher a year later in 17 out of 18 instances, Detrick adds. But other market observers see more risk than reward as the S&P 500 approaches its previous highs.
Sentiment is nothing if not frothy. That’s evident in the “very vigorous public participation” in the market, remarks Julian Emanuel, chief equity and derivatives strategist for BTIG. More than the massive rise in the “FAAGM” megacap tech names, froth was evident in the bidding up of recent stock splits, which made even less sense than the rush into bankruptcy stocks. (For more on splits, read this.)
Given the availability of fractional shares on many online brokers’ platforms, the positive impact of splits on high-profile stocks, such as Apple (ticker: AAPL) and Tesla (TSLA), is further evidence of irrational exuberance that recalls the frenzy of the dot-com bubble at the turn of the 21st century.
More important, the disconnect between the stock market and underlying fundamentals is unequivocally the greatest in the past 30 years, Emanuel says in a telephone interview. There are other disconnects, too. A seemingly small example: To a football fan, it didn’t seem coincidental that the market rolled over when the Big Ten said that it would cancel the fall season, he notes.
Indeed, the S&P 500’s valuation at 26 times expected earnings, at the same time that the economy confronts the clear and present danger of a relapse, makes for a significant headwind to the stock market, Emanuel continues.
That’s even before considering the political season ahead, in which the invective will only get nastier, and continued wrangling over much-needed relief for households will persist. Then there’s the inexplicable but persistent tendency of the stock market to get battered in September, in the middle of the Northern Hemisphere’s hurricane season.
The key question for investors to ask themselves is how they would react in the event of a typical 10% to 15% correction, Emanuel says. Such a setback should be far from surprising, given the current state of the market and the underlying fundamentals. But it wouldn’t be the start of a new bear market, he emphasizes.
If you aren’t prepared to put more money to work in the market during such a drawdown, you own too many stocks now, he pointedly advises. He suggests taking some chips off the table to raise cash, and rotating out of the huge winners into laggard sectors, such as energy and financials, as well as health-care stocks.
What seems apparent is that investors have embraced the view of Dr. Pangloss, who famously asserted in Voltaire’s Candide that this is the best of all possible worlds, writes James Montier of GMO, the institutional money manager, in a client note.
Voltaire also wrote, “Doubt is not a pleasant condition, but certainty is absurd,” an observation that Montier says applies to the U.S. stock market.
Suddenly, It’s Not Just Bitcoiners Who Think the Dollar’s Going Down
As the news broke in recent days that Warren Buffett’s Berkshire Hathaway had bought shares in a gold miner, commentators immediately began to wonder if the billionaire investor might be betting against the U.S. economy or the dollar.
Bitcoin analysts and investors wondered why it took him so long, given the trillions of dollars of money pumped into the financial system this year by the Federal Reserve to help fund the ballooning U.S. national debt.
“The money printer working overtime is obviously causing Buffett and his board grave concern,” Mati Greenspan, of the foreign-exchange and cryptocurrency research firm Quantum Economics, wrote Monday. “While Buffett is perhaps not so sure how to react to a world that no longer values bonds and government debt, others are sure.”
There’s a growing sense among members of the cryptocurrency community that their longstanding assessment of the traditional financial system as unsustainable is finally gaining traction among Wall Street experts and mainstream investors. If the concerns spread, it might buoy prices for bitcoin, which many digital-asset investors view as an inflation hedge similar to gold.
Goldman Sachs, which in May of this year panned bitcoin as “not a suitable investment,” hired a new head of digital assets earlier this month and acknowledged rising interest in cryptocurrencies from institutional clients. The firm warned in July that the U.S. dollar was at risk of losing its status as the world’s reserve currency.
Dick Bove, a five-decade Wall Street analyst who now works for the brokerage firm Odeon, wrote last week in a report that the U.S. dollar-ruled financial system could come to an end amid challenges from a possible multi-currency system, which include digital currencies.
“The case for bitcoin as an inflationary hedge and sound investment is being articulated with crystal clarity by influential people outside of our crypto bubble,” the digital-asset analysis firm Messari wrote last week. Buffett didn’t return a call for comment.
Dollar Dominance On The Wane?
Whether or not bitcoin and other cryptocurrencies are the answer, there’s little on the horizon that might turn investors away from the gnawing sense that U.S. finances are becoming more precarious.
Goldman Sachs economists predicted in an Aug. 14 report that the Federal Reserve will pump $800 billion more into financial markets by the end of this year, followed by another $1.3 trillion in 2021.
According to Bank of America, there’s a risk investors might shift their “portfolio allocation out of U.S. dollar assets” to position for the “erosion of the hegemony of the dollar as a reserve currency.”
“A constitutional crisis is one dynamic that could potentially accelerate the process of de-dollarization,” they wrote, noting that November’s presidential election might be “fiercely divisive” and “contested.”
According to the bank, a recent survey of fixed-income money managers showed nearly half of respondents expect foreign central banks to decrease their reserve holdings of dollars and dollar-denominated assets over the next year.
It may not sound outlandish to bitcoin bulls.
Fed Chair Powell’s Jackson Hole Speech Could Hint at US Dollar’s Future
A speech by Federal Reserve Chair Jerome Powell scheduled for Thursday offers a reminder of just how dramatically once-slow-moving monetary forces have accelerated due to the devastating economic toll of the coronavirus pandemic.
This time last year, President Donald Trump was vehemently criticizing Powell on Twitter for setting interest rates too high, as U.S. economic growth slowed and the national debt swelled past $22 trillion.
This time last year, then-Bank of England Governor Mark Carney delivered a speech at the Fed’s annual Jackson Hole Economic Symposium in Wyoming warning the U.S. dollar’s status as the de facto global currency contributes to an unsustainable international economic and monetary regime.
He argued that world leaders should create a “synthetic hegemonic currency,” potentially provided “through a network of central bank digital currencies.”
Fast forward to now, and the Jackson Hole conference has been forced to go virtual because of the coronavirus. Trump’s economic stewardship, including a U.S. stock market that many investors now say is propped up by the Fed’s $3 trillion of freshly printed money, has become a core issue in the 2020 presidential election. The national debt now stands at $26.5 trillion.
Digital currencies are now being studied and pursued by central banks in China, the U.S. and just about everywhere else. Goldman Sachs recently warned the dollar risked losing its dominant reserve status.
“The pandemic has sped up key structural trends and triggered substantial market swings,” strategists for the $7 trillion money manager BlackRock wrote this week. “The policy revolution was needed to cushion the devastating and deflationary impact of the virus shock. In the medium term, however, the blurring of monetary and fiscal policy could bring about upside inflation risks.”
As the spread of the coronavirus earlier this year triggered lockdowns and quarantines, the global economy this year entered its deepest recession since the early 20th century.
When markets from stocks to bitcoin swooned in March, the Fed slashed interest rates close to zero and has since announced plans to buy U.S. Treasury bonds in essentially unlimited amounts while providing emergency liquidity for money markets, Wall Street dealers and corporations.
“The road ahead is highly uncertain,” Fed Governor Michelle Bowman said Thursday in a speech in Kansas.
‘No Easy Way Out’ For Powell
Many investors are betting on bitcoin as a hedge against the potential debasement of the U.S. dollar, but Fed officials say deflationary forces might be stronger because of an expected drop off in demand from consumers and households.
Analysts for Bank of America, the second-biggest U.S. bank, wrote earlier this week in a report that bond market traders expect the Fed to adopt a “major new policy framework aimed at better achieving its 2% target” for annual inflation.
As of the last reading, the central bank’s preferred measure of consumer price increases registered just 0.9%, so the baseline expectation is the Fed would let inflation rise well above 2% so that the average over a long period of time gets closer to the target.
“Let us be optimistic and say it takes three years to create some inflation,” Matt Blom, head of sales and trading at the digital-asset firm Diginex, wrote Wednesday in an email. “We would need to drive it above 3.5% and maintain it there for years before we are able to use an average calculation.”
It’s unclear what Fed scenario is already priced into the market, but Bank of America’s Athanasios Vamvakidis, a foreign-exchange analyst, wrote that there is “no easy way out” for Powell and his colleagues.
“Without inflation eventually acting as a budget constraint, we see risks for recurring and worsening bubbles, with further divergence between Wall Street and Main Street,” Vamvakidis wrote.
What Powell’s Speech Could Say About The Dollar’s Future
Crypto traders will focus in the short term on what the Fed’s speech might mean for bitcoin prices, which have surged almost 60% in 2020, far exceeding this year’s 7.7% year-to-date gain in the Standard & Poor’s 500 Index of U.S. stocks.
But the Fed’s actions could also have implications for ether, the native token of the Ethereum blockchain, where entrepreneurs are developing alternative currencies and semi-autonomous lending and trading networks that might one day replace the current financial system. There’s also a fast-growing business in dollar-linked “stablecoins,” with the amount doubling this year to $13 billion.
“So much has changed,” said Joe DiPasquale, CEO of the cryptocurrency-focused hedge fund BitBull Capital. “There is this danger of the U.S. [dollar] in the future no longer being the world’s reserve currency. We are in a much worse position than we were in a year ago.”
Mati Greenspan, founder of the cryptocurrency and foreign-exchange analysis firm Quantum Economics, wrote this week that Powell’s return to Jackson Hole comes at a time when “people are just starting to ask questions about the intrinsic value of money.”
“U.S. authorities have just taken on an inordinate amount of debt, more than they could possibly ever hope to pay back,” Greenspan wrote. “So the only viable option is to decrease the value of that debt by way of monetary debasement. It’s despicable and dangerous, but the only other option is austerity, which is too unpopular for any public servant to mention at this time.”
US Dollar Slides To Lowest Level In 2 Years As Nation Grapples With TrumponomicsFail#
* The US Dollar Index fell to its lowest level since May 2018 on Tuesday as investors grew more bearish toward the currency.
* The gauge has dropped for five days straight amid continued virus risk and fears of new stimulus arriving too late to best aid the economy.
* With short interest in the dollar booming and other countries better handling their outbreaks, the currency stands to fall further before regaining its strength.
* Watch the US Dollar Index update live here.
The greenback slid to a two-year low on Tuesday as investors grew increasingly concerned about how a stimulus deadlock could exacerbate the coronavirus’ economic scarring.
The US Dollar Index – which tracks the dollar’s value against a basket of other currencies – fell as much as 0.8% to its lowest since May 2018. The gauge has fallen for five days straight, bringing its year-to-date drop to around 4.2% as the US continues to grapple with the pandemic.
The dollar began its decline in March as the virus slammed the economy and forced widespread lockdowns. The drop worsened through the summer as premature reopenings kicked off a second wave of infections.
With legislators failing to agree on new fiscal stimulus and outbreaks continuing to cripple economic activity, the US currency stands to worsen compared to nations containing the virus.
“Longer-term, we see dollar weakness as US debt grows, and the global recovery gains momentum. Near term, dollar may strengthen with uncertainty during flu season,” Eric Bright, managing director at Bel Air Investment Advisors, said.
Investors had already been hedging the dollar’s weakness and buying gold, but institutional players are now entering the trade. Hedge funds are net short on the dollar for the first time since May 2018, according to data compiled by Bloomberg.
Such bearish activity could place greater downward pressure on the dollar if other nations rebound faster than the US.
The Dollar Index stood at 92.36 as of 11:50 p.m. ET Tuesday.
A Flexible Fed Means Higher Inflation
Broad thrust of central bank’s new strategy is that it will be even more dovish, and interest rates will stay low for even longer
The Federal Reserve has just given itself a license to do pretty much whatever it wants.
Chairman Jerome Powell will no doubt disagree: His speech on Thursday set out a new target for average inflation of 2%. But because he ruled out any mathematical definition of the average, anything from serious deflation up to inflation of 3.2% over the next five years could count as success.
This isn’t really a problem. The broad thrust of the Fed’s new strategy is that it will be even more dovish, and interest rates will stay low for even longer. But—and it is a vital point—what the Fed is really saying is that we should trust that it won’t let inflation spiral out of control, so any overshoots of 2% won’t last long.
The Fed wants people to believe inflation will be roughly 2% in the long run, and more precision than that isn’t really necessary.
Those who prefer their monetary policy to be governed by rules will be disappointed. The Fed used to let bygones be bygones, ignoring what had happened to inflation in the past as it pursued its goal of 2% in future.
A catch-up strategy means that the failure to hit 2% for most of the past decade could be used to justify inflation above 2% for most of the next decade. The lack of a firm rule, though, means Mr. Powell isn’t tied to having to compensate for any future period above 2% by running below that for a while afterward.
Mr. Powell says the new approach is flexible. He isn’t kidding. Choose your period, and almost anything can be justified. Since 1960, inflation has averaged 3.2% (using the mathematically correct geometric, or compound, average of the Fed’s preferred inflation measure).
A hawk applying a strict policy of inflation averaging could justify aiming for deflation for years to bring the long-term average back down to 2%. Some bygones will still be ignored.
The same mathematical problem bedevils what might appear to be more reasonable approaches. Should the average apply since the Fed adopted its target in 2012? Since Mr. Powell took over in 2018? Since five years ago?
There is no correct answer, and the results are different enough to be significant for policy: Start from 2012, and the next five years need inflation of 3.2% to bring the average up to the goal. Start from Mr. Powell’s appointment, and it needs to be 2.3%, while starting five years ago would require inflation of 2.5%.
Rather than get lost in the math, the Fed’s new policy is just saying that the central bank will be really dovish for a really long time. The dovishness is backed up by a shift on unemployment, too, where low numbers of jobless will no longer prompt pre-emptive action to head off inflation.
Investors heard him, and responded appropriately. Long-dated bond yields jumped as they usually do when rates are cut, as the Fed was no longer expected to choke off a recovery so soon.
It is easy to argue that all this is irrelevant. The Fed is stuck with zero rates, has ruled out going negative and has been slow to set explicit targets for bond yields, something known as yield-curve control. With its inflation measure at just 1% last month, there is little need to worry about what will happen at 2% now.
But it matters for markets, and so for the economy. Thursday’s markets did exactly what Mr. Powell must have been hoping: higher long-dated Treasury yields, but also higher stock prices—with the biggest losers this year turned into winners, and vice versa.
Out of Thursday’s top 100 performers in the S&P 500, all but six had lagged behind the index this year, with the majority falling by double-digit percentages. The reflation trade was back, and showed that investors think the Fed still has power.
Quite how that power will be used is less clear than it was. The new policy means the Fed can more easily justify higher inflation, and surely will. But where it will draw the line remains uncertain. If and when inflation picks up again, working out what “flexible” means will be critical for investors.
Top Fed Official Says New Framework Provides More Humble Approach to Setting Rates
Changes reflect reality that economic models ‘can be and have been wrong,’ says Vice Chairman Richard Clarida.
A top Federal Reserve official said the central bank would resume discussions at its meeting in two weeks over how it could refine its guidance about plans to keep interest rates lower for longer.
Fed Vice Chairman Richard Clarida offered little specifics about what changes might be considered or when they might be unveiled, saying he didn’t want to prejudge the outcome of coming discussions. The Fed’s next policy meeting is Sept. 15-16.
Officials are turning their attention to what ways they can provide more support to the economy after cutting rates to near zero in response to the downturn caused by the coronavirus pandemic in March. They are buying Treasury and mortgage securities at a rate of more than $1 trillion a year and have signaled no interest to raise rates for years.
The coming discussions on how to tweak their asset purchase program or refine their so-called forward guidance about interest rates has been smoothed by the conclusion last week of a yearlong policy revamp in which the Fed will seek periods of slightly higher inflation after periods in which price pressures run below their 2% target.
In remarks Monday, Mr. Clarida said the central bank needed to be more skeptical of models that predict higher inflation when setting interest-rate policy, given the weak response of inflation to lower levels of unemployment over the past decade.
The Fed’s new framework states that the Fed won’t raise interest rates simply because unemployment has fallen to a low level estimated to spur faster price inflation, Mr. Clarida said.
Concerns that too-low levels of unemployment would lead to a surge in inflation led the Fed to very slowly begin raising rates in 2015 after seven years in which rates were pinned near zero.
Mr. Clarida signaled a note of humility in his remarks Monday. The change “reflects the reality that economic models of maximum employment, while essential inputs to monetary policy, can be and have been wrong,” he said.
“A decision to tighten monetary policy based solely on a model without any other evidence of excessive cost-push pressure…is difficult to justify given the significant cost to the economy if the model turns out to be wrong.”
Mr. Clarida said the Fed needed to change its policy-setting framework because officials will have less room to spur growth by cutting interest rates in a world where they are pinned near zero more often.
The Fed formally adopted a 2% inflation target in 2012 but since then has encountered greater challenges boosting inflation because their main policy tool, a short-term benchmark interest rate, has been pinned near zero.
If the central bank targets 2% inflation and consistently falls short, expectations of future inflation will slide, making it much harder to achieve the target, said Mr. Clarida.
The changes adopted last week also effectively raised the Fed’s inflation target by saying the central bank should take past misses of the 2% target into account and seek periods of moderately higher inflation to compensate.
Mr. Clarida said Fed officials believed two tools—forward guidance and asset purchases, which the central bank deployed last decade—would be best suited to provide stimulus after the Fed lowered rates to zero.
Mr. Clarida reaffirmed the Fed’s lack of support to cut rates below zero and said a separate strategy of committing to purchase unlimited amounts of Treasury securities to cap yields remained an option, but one that is on the back-burner.
If forward guidance and other central bank communication is credible, caps would provide only modest benefits. “The approach brings complications in terms of implementation and communication,” said Mr. Clarida. Still, he said, the Fed believed the tool should remain an option “if circumstances change markedly.”
Mr. Clarida, who has led the Fed’s framework review initiated by Chairman Jerome Powell in late 2018, said the central bank’s rate-setting committee will turn its attention at coming policy meetings to possible refinements to other communication tools, including its statement of economic projections. The Fed will try to reach a decision on any changes by December, he said.
Bitcoin Nears $12K As Dollar Declines To 29-Month Low
Bitcoin is drawing bids amid a sell-off in the U.S dollar, with new signs emerging that the largest cryptocurrency is maturing as a global asset class.
* At the time of writing, bitcoin is trading near $11,900 – up 2% on the day. Prices reached a high of $11,964 early Tuesday, according to CoinDesk’s Bitcoin Price Index.
* The dollar index, which gauges the greenback’s value against major currencies, is currently trading 0.4% lower at 91.75, the lowest level since April 2018. The greenback is down more than 10% from highs seen in Mach.
* “From a macro level, the U.S. dollar has continued to fall since [the Federal Reserve’s Jackson Hole meeting], creating a further buying pressure on bitcoin and broader safe-haven commodities such as gold,” Matthew Dibb, co-founder of Stack, a provider of cryptocurrency trackers and index funds, told CoinDesk in a WhatsApp chat.
* Investors are selling dollars, possibly on bets that interest rates in the U.S. would remain low for a long time.
* The Federal Reserve now has the room to hold rates low for a prolonged period, having signaled tolerance for high inflation last week.
* U.S. inflation expectations have continued to strengthen since Fed Chair Jerome Powell’s inflation speech at Jackson Hole last week.
* The 10-year breakeven inflation rate, or the bond market’s expectation of price pressures over the next ten years, rose to 1.8% on Monday, the highest level since Jan. 2, according to the Federal Reserve Bank of St. Louis.
* Long-term inflation expectations have more than tripled in the past 5.5 months to 1.8%.
* Additional bullish pressure for bitcoin may be stemming from ether’s rise to two-year highs near $470.
* “Bitcoin is showing significant strength today on the back of recent gains in ethereum and the broader alternative cryptocurrencies,” Dibb said, citing increased buying in the $12,000 call option expiring in September as evidence of the market’s short-term bullish mood.
* The Singapore-based QCP Capital noted in its Telegram channel that “there was a flurry of put buying on Monday and more of such hedging flows may be seen in the next weeks if bitcon is held below $12,500.”
Jerome Powell Throws Us Dollar Under A Bus In Jackson Hole
Fed Chairman Jerome Powell threw the U.S. dollar under a bus last week at the central bank’s annual Jackson Hole, Wyoming, meeting.
The Economic Policy Symposium hosted annually by the Federal Reserve Bank of Kansas City — an event attended by finance ministers, central bank managers and academics, among others — was held virtually due to COVID-19 concerns this year, and there was little virtual about the announcement. The U.S. dollar would be fed to the wolves.
A Monumental Shift From An Already-Unprecedented Monetary Policy Stance
To be sure, the Fed has persisted with an accommodative monetary policy posture since the Great Recession despite strong years of growth in the middle of the Obama years and sluggish yet consistently positive growth the rest of the time.
Before the coronavirus pandemic, the Fed had begun raising interest rates beyond the zero range, as the need to leave something in the tank should another crisis ensue was acknowledged.
Those moves were roughly in line with growing central banker concerns globally that accommodative monetary policy had failed to generate robust growth rates and risked making central bankers toothless in case a serious recession occur.
What has been little understood through the last two decades is that with Chinese imports raging throughout western markets, deflationary forces were being bought inbound at the same time as labor demand faced unprecedented challenges.
The global economic structure was changing.
Nevertheless, central banks around the world persisted in their efforts to inflate economies and encourage growth — not that there was no growth. In fact, when Powell took over the reins in 2018, the United States was enjoying the longest period of economic expansion in its history. But the growth was sluggish.
Changing Course Just At The Wrong Time
The Federal Reserve had raised rates nine times between 2015 and 2018, with prices stagnating every time it did. That change in direction, however, was soon to be turned on its head courtesy of a 100-year pandemic.
Since the COVID-19 onslaught, the Fed and its counterpart banks slashed rates back down to zero-bound levels, as economies were brought to a standstill. In March, the Fed announced a policy of being prepared to purchase an unlimited amount of treasuries and mortgage-backed securities to shore up financial markets.
Its balance sheet ballooned by over $3 trillion to around $7 trillion with no end in sight. And last week, Powell revealed a much-anticipated stance of “average inflation targeting.” Since 1977, the Fed’s dual mandate has been to maintain maximum employment and stable prices. The latter is considered a 2% inflation rate.
All that changed last Thursday. By targeting average inflation, Powell indicated that the Fed would keep interest rates lower than they needed to be, notwithstanding the health of the economy to push prevailing inflation above 2% if inflation had previously run lower than that for too long.
In today’s context, the picture is frightening. Inflation has run just significantly shy of 2% since the Great Recession. To drag that average up to the target rate retrospectively, Powell and colleagues may be set to target levels around 3% for a prolonged period of time.
What Average Inflation Targeting Could Mean For The Dollar
If the Fed maintains an accommodative monetary posture well into a broader economic recovery, the results will almost undoubtedly be asset bubbles in stocks and housing. That is exactly what happened following the recovery from the Great Recession. In fact, stocks have already proven buoyant since the coronavirus shutdowns, with investors ensured continued asset price support from regulators.
The Wall Street maxim “never bet against the Fed” has never been truer. Wealthy investors, always the first in line for cheap money, stand to gain the most from low-interest rates. The impact of that is bubbles in valued assets like housing that price ordinary homeowners out of the market.
Another obvious peril for the economy is the debasement of the currency. Already, investors and corporations have seen the writing on the wall. MicroStrategy, a publicly-traded business intelligence company, recently swapped its U.S. dollar cash reserves for Bitcoin (BTC) to avoid a balance sheet loss that would result from a falling dollar.
The Winklevoss twins argue that inflation is inevitable. While gold, oil and the U.S. dollar have long been the go-to safe-haven assets, gold and oil are illiquid and difficult to store, and the U.S. dollar is no longer safe as a store of value. They see Bitcoin benefiting enormously from the Fed’s actions.
Don Guo, The Ceo Of Broctagon Fintech Group, Pointed Out:
“Should inflation continue to run high, we can expect many investors to use Bitcoin as a hedge, propelling its price up further. Throughout 2020, numerous analysts have predicted Bitcoin to reach heights that are unheard of, and it is undeniable that the market is in an even stronger position than it was during its 2017 bull run. Since then, the market has matured greatly, with increased institutional involvement and media popularity as a result.”
If inflation appears inevitable to the Winklevoss twins, the Fed has all but guaranteed it. Grayscale recently released a report, arguing:
“Fiat currencies are at risk of debasement, government bonds reflect low or negative real yields, and delivery issues highlight gold’s antiquated role as a safe haven. There are limited options to hedge in an environment characterized by uncertainty.”
Fixed supply assets such as Bitcoin appear primed to triumph from Jerome Powell’s latest set of announcements. As the dollar suffers the fate of significant value debasement at the hands of regulatory overkill, Bitcoin is sure to emerge as a winner.
22% Of All Us Dollars Were Printed In 2020
$9 Trillion in Stimulus Injections: The Fed’s 2020 Pump Eclipses Two Centuries of USD Creation.
Since September 2019, research shows the Federal Reserve has pumped over $9 trillion to primary dealers by leveraging enormous emergency repo operations. A recently published investigative report shows the U.S. central bank submits the daily loan tally, but the Fed will not provide the public with information concerning the recipients. Estimates say, in 2020 alone, the U.S. has created 22% of all the USD issued since the birth of the nation.
The U.S. Federal Reserve has printed massive amounts of funds in 2020 and bailed out Wall Street’s special interests during the last seven months. On October 3, 2020, Redditors from the subreddit r/btc shared a video called “Is Hyperinflation Coming?” and discussed how the U.S. central bank has created 22% of all the USD ever printed this year alone.
“The U.S. dollar has been around for over 200 years and for the bulk of that time, it was backed by gold,” one Reddit user wrote on Saturday. He added:
Having a quarter of all USD printed in a single year is more than alarming, it’s mind-blowing.
Additionally, on October 1, 2020, Wall Street on Parade’s (WSP) Pam Martens and Russ Martens published a comprehensive report on how the U.S. central bank pumped out “more than $9 trillion in bailouts since September.” The findings show that the Fed is also getting market advice from Wall Street hedge funds like Frontpoint. The hedge fund Frontpoint Partners is a controversial firm because it shorted the subprime mortgage market during the 2007 to 2010 financial crisis.
The latest WSP analysis shows that the Fed has been “conducting meetings with hedge funds” like Frontpoint in order to get the financial institution’s “input on the markets.” In 2007 to 2010, the Fed was leading a group of lending facilities and once again the central bank is working with three major emergency lending facilities: the Money Market Mutual Fund Liquidity Facility; the Primary Dealer Credit Facility; and the Commercial Paper Funding Facility.
“On top of those facilities, beginning on September 17, 2019 – months before the first case of Covid-19 was reported in the United States – the New York Fed embarked on a massive emergency repo loan operation, which had reached $6 trillion cumulatively in loans by January 6,” the WSP findings detail. The Martens’ also state:
The Fed has provided data on the total amounts of the daily loans, but not the names of the recipients. All it will say is that the loans are going to its 24 primary dealers, which are the trading units of the big banks on Wall Street. The last time we tallied its data in March, it had sluiced over $9 trillion cumulatively to these trading houses.
A number of people believe that the massive creation of money stemming from the Fed will eventually cause hyperinflation. The dollar has lost considerable value since the introduction of the central bank in 1913. For instance, the cumulative rate of inflation since 1913 is around 2,525.4%. This means a product purchased for $1 in 1913 would cost $26.25 in October 2020.
Precious metals and cryptocurrency proponents believe the central bank’s pumping will bolster assets like bitcoin and gold. Pantera Capital CEO Dan Morehead explained in July that the company believes cryptocurrencies like bitcoin (BTC) will help people with the gloomy economic outcome.
“The United States printed more money in June than in the first two centuries after its founding,” Morehead wrote in a letter to investors. “Last month the U.S. budget deficit — $864 billion — was larger than the total debt incurred from 1776 through the end of 1979.”
On the same day Pantera Capital published the letter called “Two Centuries Of Debt In One Month,” the 22-year congressional veteran, Ron Paul, told the public that Americans should be “prepared.”
Paul has exposed the U.S. Federal Reserve for the last two decades and has written extensively about the central bank’s fraud. In the video, the former congressional leader said the medical community, U.S. bureaucrats, and the Fed have done things he never expected.
“After so many years in Washington, I thought I was immune to being shocked by what our government does,” Paul detailed. “But the actions that our elected officials… the Fed… even the medical community have taken in the past few weeks have gone beyond anything I could have imagined.”
“Most Americans will be blindsided by what’s going to happen. Make sure you, your family, and anyone you care about are prepared,” the former U.S. Presidential candidate insisted.
Meanwhile, the U.S. airline industry is looking for a second bailout, three days ago the number of the country’s mortgages involved in the bailout program spiked by 21,000, the hotel industry is looking for stimulus, and President Trump recently revealed a multi-billion dollar farm bailout.
A Weakening U.S. Dollar Is Still The Preeminent Currency
The greenback has depreciated 11% from its March peak, but it has a long way to go before it gives up its reserve status.
In early June, the U.S. dollar appeared to be in total free fall. From May 14 through June 8, the Bloomberg Dollar Spot Index tumbled 4.6%, effectively wiping out all of its appreciation during the worst of the coronavirus crisis. A Bloomberg Opinion column from Stephen Roach, former chairman of Morgan Stanley Asia, declared: “A Crash in the Dollar Is Coming.” He got a lot of pushback.
Depending on how you define a “crash,” it certainly looks as if the Yale University faculty member had the direction right. The Bloomberg dollar index is down an additional 3.7% since then, well below its moving averages and dangerously close to breaking through a key intraday level that could give traders scope to push it lower by at least 2% more.
The four-year chart, which captures the ups and downs of the foreign-exchange market since President Donald Trump was elected, looks rather ominous.
Yet when evaluating the dollar on a 10-year time horizon, the greenback’s move over the past several months looks less like a crash and more like a simple unwind of the haven flows during the height of the Covid-19 pandemic, combined with a natural weakening given the Federal Reserve’s relatively more aggressive monetary policy response compared with its global central bank peers.
When thinking about the fate of the U.S. dollar, it’s crucial to separate an extended decline in the greenback’s exchange rate from the prospect of America losing its place as issuer of the world’s primary reserve currency.
These are distinct outcomes with drastically different implications. The former is hardly unusual, given that the dollar has historically fluctuated in multiyear cycles since the early 1970s. The latter would represent a seismic shift in the structure of the global financial system.
Simply put, it’s in no country’s or region’s best interest (at least not imminently) for the U.S. dollar lose its place as the reserve currency of choice. That means the dollar will retain its place on the global stage no matter how weak it might get in the months to come. But make no mistake: There are any number of reasons to bet that the greenback will slide further.
Most obviously, the dollar tends to appreciate when U.S. interest rates climb and weaken when they fall. Short-term Treasury yields are pinned near zero and are expected to stay there for years, while longer-term yields have increased somewhat but remain near all-time lows.
There’s also the well-known fact that the federal budget deficit has ballooned this year in response to the Covid-19 pandemic. Traders widely expect that large shortfalls will continue in the year ahead, particularly if the Democratic Party sweeps the White House and both chambers of Congress, as polls indicate.
Either way, America’s so-called twin deficits — in both its current account and budget — are so extreme that a regression analysis from Bloomberg News’s Cameron Crise projects a 31% decline over the next two years in the ICE U.S. Dollar Index, known as DXY. There’d certainly be no hyperbole in calling that a “crash.”
It’s hard to imagine that sort of precipitous decline happening, however, without an exogenous shock that’s separate and distinct from interest rates and deficits. My Bloomberg Opinion colleague Noah Smith posited last month that a complete breakdown in America’s institutions could be that force:
Urban chaos, violent conflict and uncertainty over who will control the country in the coming years make for a very bad business environment. In a worst-case scenario, businesses and investors could decide the U.S. is a failing state and that their money is best kept elsewhere, at least until things quiet down.
The result could be an unprecedented capital flight — money stampeding out of one of the world’s largest economies and abandoning the reserve currency at the same time. That would probably mean a dollar crash, a surge of U.S. inflation and destabilizing flows of hot money into Europe, Japan, Canada, Australia, South Korea and other, more stable developed nations.
Suffice it to say, that sort of dystopian outlook probably shouldn’t be anyone’s base-case scenario for how the next few months will unfold in the foreign-exchange market.
Indeed, speculative U.S. dollar traders recently turned positive on the greenback for the first time in four months, with net noncommercial positions in DXY futures rising above zero for the first time since June, according to Commodity Futures Trading Commission data.
While that’s hardly a decidedly bullish position, it at least suggests a sizable pool of money will take the other side of the dollar doomsday narrative.
The most likely path for the dollar remains lower, though it stands to reason that traders want to get through the U.S. elections before going out on a limb. Both a “blue wave” and a contested presidency could send the greenback spiraling.
Some, like Roach, would argue that another four years of a Trump administration and its protectionist trade policies and withdrawal from crucial global agreements would also erode the dollar’s value because the rest of the world sees America as an unreliable global leader. On the other hand, a clean Joe Biden victory combined with a Republican Senate and Democratic House could mean gridlock and comparatively tame budget deficits.
But even if the dollar falls 2%, 5% or even 20% more — which would put it near its post-2008 crisis low — it’s not an existential threat as long as the greenback holds onto its “exorbitant privilege.” It’s not particularly close to giving that up, with International Monetary Fund data showing $6.8 trillion of FX reserves held in dollars compared with $2.2 trillion in euros, $625 billion in yen and $486 billion in pounds.
So don’t sweat the continued slide in the dollar too much. Whether considered weak or strong, it’s poised to remain the epicenter of the financial world for many years to come.
Mexico Senate Passes Bill To Make the Central Bank Buy Unwanted Dollars
Mexico’s Senate approved Wednesday a bill that will force the central bank to buy dollars from banks that can’t place them elsewhere, ignoring concerns from policy makers that the bill could make the bank take illegal drug money.
Lawmakers brought the bill to a vote, only hours after top members of the country’s bank association had warned that the bill threatened the autonomy of the central bank and could expose it to sanctions for money laundering if it was approved. The bill goes on to the lower house for a debate and vote.
The legislation would force the central bank to buy up foreign currency from local banks, who end up with excess dollars from cash remittances and tourism. Lawmakers introduced a tweak to the original bill, presented by Morena Senate leader Ricardo Monreal, that said Banxico would not have to buy dollars from any one on government black lists.
Monreal said the bill was needed to help migrants who return for the holidays with wads of cash. “This is no attack on central bank autonomy,” he said. “Banco de Mexico has to be less conservative.”
Banxico said in a statement late Wednesday that senators had ignored its input, and noted the changes to the bill did not ease its concerns.
Following money laundering allegations against HSBC Holdings Inc. and Wachovia Corp. over a decade ago, U.S. banks have increasingly severed relationships with Mexican institutions to protect themselves from potential sanctions.
That is not much of a problem for the global banks operating in Mexico like Banco Bilbao Vizcaya Argentaria SA or Citigroup Inc., but it crimps business by Mexican banks, which can’t easily unload dollars.
Opposition lawmakers said the bill had been forced through the Senate by President Andres Manuel Lopez Obrador’s Morena party without listening to the concerns of the central bank. The bill was introduced, unexpectedly, late last month.
Senator Emilio Alvarez Icaza, an independent, said the bill would turn Banxico into “a money launderer.”
Alvarez said lobbyists of Grupo Salinas had pushed lawmakers to approve the bill. “Is this bill dedicated to one of the president’s special allies to whom he wants to do a favor?” Alvarez said. Grupo Salinas is controlled by Mexico’s third-richest man, billionaire Ricardo Salinas, whose Banco Azteca has played a key role in disbursing Lopez Obrador’s cash aid programs.
Grupo Salinas spokesman Luciano Pascoe said in a text message that the group did “not have any comments on the rumors a senator spreads.”
Even Senator Nancy de la Sierra, a member of the ruling party coalition, said the issue of migrant remittances was used to justify the bill, though such cash remittances are minimal.
Central bank board member Gerardo Esquivel, who has supported the ruling party coalition, said the bill’s passage “puts international reserves at risk while attacking the Bank of Mexico’s autonomy.” Writing on Twitter, he said he hopes the lower house “corrects this situation.”
Earlier Wednesday, Eduardo Osuna, CEO of BBVA Mexico, and Barclay’s country chief Raul Martinez-Ostos had criticized the bill. Luis Nino, president of Mexico’s bank group ABM and the chairman of Banco Azteca, said that Mexican banks had solid anti-money laundering protocols in place and that it was not the place of ABM to reject legislative proposals.
In a separate vote Wednesday evening, the Senate also ratified the president’s nomination of Finance Ministry treasurer Galia Borja Gomez as a member of the central bank board. Former Economy Minister Graciela Marquez was also approved to the board of the national statistics agency.
Fed Reinforces Plans To Provide Open-Ended Stimulus To Spur Recovery
Most central bank officials project interest rates will remain near zero for at least three years.
Federal Reserve officials put the final touches Wednesday on a monthslong effort to clarify their plans to support the economy for longer than they have following prior downturns, concluding one of the most active years in the central bank’s history.
Fed officials slashed their short-term interest rate to near zero in March as the coronavirus pandemic disrupted financial markets and the economy. They also launched an array of emergency lending programs and began large-scale purchases of government debt and mortgage securities.
On Wednesday, officials updated their formal guidance around how long those purchases would continue, complementing an earlier pledge in September that set a higher bar to raise interest rates.
The Fed has been buying $80 billion in Treasurys and $40 billion in mortgage bonds a month since June while pledging to maintain those purchases “over coming months.”
On Wednesday, the central bank stated those purchases would continue “until substantial further progress has been made” toward broader employment and inflation goals. Officials don’t expect to reach those goals for years, according to projections they released Wednesday.
“Together these measures will ensure that monetary policy will continue to deliver powerful support for the economy until the recovery is complete,” Fed Chairman Jerome Powell said at a news conference after Wednesday’s meeting.
The projections show most officials thought they would hold short-term rates near zero for least three more years despite a somewhat more optimistic economic outlook than they had in September, before drugmakers had developed highly effective Covid-19 vaccines.
Many officials projected such low rates would be needed even though they projected inflation would be at the Fed’s 2% target and unemployment would fall below 4% by the end of 2023. Those projections reflect a change in the central bank’s framework adopted this summer that took a more relaxed view toward inflation.
Mr. Powell said the central bank expected to see some one-time increases in prices of goods and services due to a rebound in activity from the pandemic next year but that they were unlikely by themselves to create self-sustaining inflationary forces.
“It’s not going to be easy to have inflation move up,” said Mr. Powell. “We’re honest with ourselves and with you in the [projections] that even with the very high level of accommodation that we’re providing…it will take some time.”
With interest rates pinned near zero, the asset purchases have become the primary lever with which officials could dial up or down their stimulus.
The goal of the Fed’s new guidance is to avoid the kind of market backlash that occurred in 2013, when then-Chairman Ben Bernanke suggested the central bank might soon taper its asset purchases.
Investors thought the Fed was accelerating its plans to raise interest rates, sparking a sudden one-percentage-point jump in the 10-year Treasury yield that became known as the “taper tantrum.”
Some analysts have said that communicating the Fed’s intentions earlier would reduce the chance of any perception later that it was abruptly tightening monetary policy.
“They’ll be buying assets for a fair while. Even if everyone expected this, it’s useful because it keeps people from getting the wrong idea,” said William English, a former senior Fed economist who now teaches at Yale University.
How effective has the Fed’s communication around its policy strategy been this year? Join the conversation below.
Mr. Powell said when the Fed believes it is close to meeting its new benchmark of substantial progress, “we will say so, undoubtedly, well in advance of any time when we would actually consider gradually tapering the pace of purchases.”
For the next few months, risks to growth are rising amid an increase in Covid-19 cases, hospitalizations and deaths. Claims for unemployment benefits jumped last week, and the Commerce Department reported Wednesday that a measure of purchases at stores, restaurants and online dropped a seasonally adjusted 1.1% in November from the prior month.
At the same time, Fed policy makers have been surprised through the late summer and early fall by the degree that economic activity held up despite worse-than-expected public-health conditions.
In recent weeks, investors have focused on whether the Fed might change the composition of its holdings by buying more Treasury securities with longer-term yields to hold those yields down, as it did during bond-buying programs last decade. Some analysts said such additional stimulus would provide added insurance against the risks to the economy from rising coronavirus cases and business restrictions.
Mr. Powell said the Fed didn’t think those charges were appropriate now because long-term rates are already very low, boosting sectors of the economy such as housing.
“Interest-sensitive parts of the economy, they’re performing well,” he said. “The parts that are not performing well are not struggling from high interest rates. They’re struggling from exposure to Covid.”
Mr. Powell said any near-term deterioration in the economic recovery would be better addressed by direct spending by Congress and the White House, not changes in interest-rate policy, particularly because it takes time for monetary policy changes to affect the economy.
The prospect of widespread vaccinations by the middle of the next year meant that “the economy should be performing strongly” by the second half of next year, Mr. Powell said.
Vaccines allow the Fed “to look through the near-term weakness, as bad as it is, because you are more confident about where the economy’s going to be six months from now—and that is what is relevant for your decision,” said Lewis Alexander, chief U.S. economist at Nomura Securities.
Bipartisan talks in the Senate have created optimism that Congress could approve a coronavirus-relief legislative package of around $900 billion before it adjourns for the year.
Since the spring, Mr. Powell has compared the government’s economic policy response to building a bridge across a chasm. “For many Americans, that bridge is there and they’re across it,” he said. But others still don’t have a bridge, including 10 million jobless workers who were employed earlier this year and small businesses unable to function because of the pandemic.
With vaccines providing more visibility about where the end of the bridge might be, “it would be bad to see people losing their business, their life’s work in many cases, because they couldn’t last another few months,” he said.
The U.S. Dollar Is Getting Crushed. Falling Below 90 For First Time Since April 2018
The U.S. dollar fell sharply versus major currencies Thursday, with bears taking the Federal Reserve’s reassurance that it won’t be soon tapering its bond purchases as a green light to sell the currency.
“The latest blow to the dollar came from the Fed, which vowed not to touch policy even if the outlook for the U.S. economy brightens as it now expects,” said Joe Manimbo, senior analyst at Western Union Business Solutions.
Weakness also reflected rising expectations that Washington lawmakers will finally agree on an economic rescue package that’s seen as necessary to shore up a sagging recovery, he said.
The ICE U.S. Dollar Index DXY, -0.72%, which measures the currency against a basket of six major rivals, slumped 0.7% to 89.828, trading below 90 for the first time since April 2018. It’s down 6.8% so far this year.
Moreover, the index has dropped nearly 13% since March, when it spiked to a more-than-three-year high as the COVID-19 pandemic plunged the U.S. economy into recession and sparked a bout of chaos in financial markets, driving global investors into the safety of the world’s reserve currency.
The Dollar’s Selloff On Thursday Was Broad:
* The euro EURUSD, the most heavily weighted component of the DXY, rose 0.6% to $1.2270, hitting its highest level versus the dollar since April 2018. For the year to date, the shared currency is up more than 9%.
* The dollar fell to a more-than-three-year low versus the Japanese currency USDJPY, -0.35%, declining 0.4% to ¥103.07.
* The British pound GBPUSD, 0.49% was up 0.5% at $1.3575, its highest since April 2018.
* Currencies that typically rally in line with equities, commodities and other assets perceived as risky were doing just that, with the Australian dollar AUDUSD, 0.67% and the New Zealand dollar NZDUSD, 0.53% each up 0.6% versus their U.S. counterpart. The dollar was off 0.1% versus the Canadian dollar USDCAD, -0.16%.
U.S. stocks pushed higher Thursday, with the S&P 500 SPX, +0.58%, Dow Jones Industrial Average DJIA, +0.49%, and Nasdaq Composite COMP, 0.84% closing at records.
A falling dollar is typically seen as a positive for U.S. and global equities as well as the world economy. It’s also seen as the potential missing ingredient for a bullish turnabout in commodities priced in the dollar.
The Fed, in its last policy meeting of 2020, on Wednesday reassured investors the central bank would maintain its easy monetary policy stance, including its bond-buying program, until the economy shows “substantial progress” toward recovering from the damage inflicted by the virus.
Fed Chairman Jerome Powell, in his news conference, indicated the central bank wouldn’t be hasty in unwinding its monetary stimulus measures even though the central bank’s economic forecasts appeared a bit more upbeat than previous iterations.
“The FOMC’s dot-plot looked hawkish…Mr. Powell’s comments were anything but,” wrote Kit Juckes, global macro strategist at Société Générale, referring to the individual rate forecasts produced by members of the policy-setting Federal Open Market Committee.
Of course, other central banks are also employing extraordinary measures aimed at supporting their economies. And while a weaker dollar is viewed as generally positive for the U.S. and global economy, it’s been a source of consternation for some rivals, including the European Central Bank.
But an important part of the tale centers on interest rates — particularly the differential between yields on bonds in the U.S. and elsewhere. While Treasurys still yield more than, say German government debt, that differential has shrunk, reducing the incentive to hold U.S. paper and weakening a source of support for the dollar.
The spread between U.S. TMUBMUSD02Y, 0.125% and German two-year yields TMBMKDE-02Y, -0.723% has narrowed from 215 basis points, or 2.15 percentage points, to around 90 basis points this year, noted Mark Haefele, chief investment officer for UBS Global Wealth Management.
Dollar weakness “also reflects the improved prospects for more pro-cyclical currencies amid recent positive vaccine news and a corresponding decline in demand for safe-haven assets,” he said, in a Thursday note, referring to the dollar’s tendency to find support during periods of turmoil.
“Meanwhile, the prospect for further U.S. fiscal stimulus, with Congress continuing to debate the details of a $900 billion COVID-19 aid bill, is likely to keep U.S. indebtedness in focus, adding to pressure on the greenback,” Haefele said.
Add in improving prospects for a trade deal between the European Union and the U.K., a compromise last week that unblocked the path to a $2.2 trillion EU recovery fund, and the continued rollout of COVID-19 vaccines and the stage is set for the dollar to keep falling, Juckes wrote.
“The only problem is that it’s falling too fast,” he said, noting that SocGen’s fourth-quarter euro forecast put the shared currency at $1.27, around 4% above its current level. The euro has risen around 3% in the last month alone.
Dollar On The Ropes
U.S. stocks climbed, with small-cap shares outperforming in one of the final trading sessions of 2020. The dollar continued its slide, weakening to the lowest in 2 1/2 years.
Automakers were among the best performers as the S&P 500 Index edged higher, while the Russell 2000 gauge of smaller companies rallied about 1% for its biggest gain in almost two weeks.
Travel and leisure companies rose in Europe after the U.K. approved a coronavirus shot by AstraZeneca Plc and the University of Oxford, offsetting pessimism sparked by a slower-than-planned rollout of shots in the U.S. Volumes were light during the holiday week, with trading in S&P 500 shares about 25% below the 30-day average. Bitcoin extended its record-breaking rally as it approached $29,000.
Investors have pushed stocks to sky-high valuations this year on expectations that widespread vaccine distribution in 2021 will reignite economic growth and boost corporate profits. The U.S. government has started sending Americans $600 payments for pandemic relief, but discouraging news came from Texas, where at least three shipments of Moderna Inc.’s vaccine arrived with signs that the shots had strayed from their required temperature range.
“Investors continue to weigh stimulus hopes against negative pandemic developments,” Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter, wrote to clients. “Markets have aggressively priced in a lot of positive resolution to these events (and more) in 2021.”
With a volatile year coming to a close, risk assets such as stocks, corporate bonds and Bitcoin are sitting at or near record highs. The MSCI World Index of global stocks is set to end the year about 14% higher, having surged almost 68% since its March low.
On the coronavirus front, daily deaths in Germany surpassed 1,000 for the first time since the outbreak began, with a record increase in the last 24 hours. A Chinese state-backed vaccine developer said one of its shots prevents Covid-19 in almost 80% of people. U.S. President-elect Joe Biden criticized vaccine-distribution efforts under President Trump as too slow.
Elsewhere, Bloomberg’s dollar gauge fell to its lowest since April 2018 as traders squared currency positions ahead of the year’s end amid thin liquidity.
China’s Rapid Recovery Puts Global Dollar Hegemony In Doubt
China’s light-speed recovery from the pandemic has reignited the perennial debate about how long the dollar’s 50-year dominance of global markets can persist.
The U.S.’s struggle to control the coronavirus and revive its economy contrasts sharply with the Asian nation, where growth has roared back. That divergence — which saw the greenback’s worst performance since 2017 as the yuan advanced — has bolstered China’s tilt at dollar hegemony, with investors flocking to onshore assets, trying out the renminbi for trade, and even giving it another look as a reserve currency.
The dollar’s demise as the world’s reserve currency has been idly speculated on and predicted for years, of course. Prior to the yuan, all the hype was about the euro as the dollar’s successor.
Nothing, though, ever managed to dent the twin forces underpinning dollar supremacy: the U.S.’s role as both global growth engine and haven of first choice for investors during crises. So powerful were these two pillars that they were given a catchy nickname in trading circles years ago — the “dollar smile.”
But recently, that smile has looked more like a smirk, with the virus eroding both of the currency’s traditional supports. Instead, it’s the yuan that’s benefiting from demand for economic outperformance, and for assets insulated from the pandemic’s fallout, bringing the currency’s long-term prospects back into focus.
“The center of the world’s economy is shifting from the Northern Atlantic, where it’s been for 500 years, to the Pacific,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “The currency markets are going to reflect that over time.”
It’s a somewhat ironic end to President Donald Trump’s pursuit of a weaker dollar. Despite frequently admonishing Beijing officials for keeping a lid on their currency to support Chinese exports at the expense of the U.S. — and starting a full-blown trade war to force their hand — it took a pandemic to change the tide.
China is reaping the rewards. The world’s second-largest economy is now set to depose the U.S. as the leading engine of growth in 2028, five years earlier than expected just a year ago after better weathering the pandemic, the Centre for Economics and Business Research said last month.
While American output is poised to rebound in 2021, growing 3.9%, China is on track to expand more than 8%. And its central bank is considering tightening monetary policy — in stark contrast with a pledge from the Federal Reserve to remain accommodative, which has helped drag down the dollar.
In fact, some see China’s economic success itself — particularly in becoming a linchpin of the global supply chain — reinforcing the trend for low interest rates elsewhere, and increasing the divergence.
“The U.S. and other countries remain reliant on the Chinese supply chain to control the pandemic while vaccinations are rolled out,” said Ben Emons, the managing director of macro strategy at Medley Global Advisors. That advantage is what “keeps G-10 central banks highly accommodative.”
Investors have certainly taken notice, pumping $135 billion into Chinese bonds in the 12 months ended Sept. 30, data compiled by Bloomberg show. Equities have also proved popular, luring $155 billion over the same period. While recent New York Stock Exchange confusion around delisting several Chinese companies served as a reminder of the regulatory and trade-related risks surrounding the nation’s assets, investors were largely unfazed.
Ultimately, it’s the record cache of negative-yielding assets elsewhere in the world that has made Chinese debt particularly appealing. China’s 10-year bonds yield more than 3%, versus just over 1% for similar-maturity Treasuries. With these securities also joining a growing number of international benchmarks that help investors set their return objectives, the renminbi is getting another look as a currency for both short- and long-term commitments.
While more than 60% of the world’s currency reserves are denominated in dollars — as they have been for over two decades — holdings of the greenback fell to the lowest since 1996 at the end of the third quarter. The euro, pound and yen have gained from this decline, yet only the yuan has seen allocations increase — to 2.1% — for the last three quarters.
That has some analysts rethinking their approach to the currency. HSBC Holdings Plc sees the yuan increasingly influencing weekly price changes in the pound and commodity-linked currencies, while strategists at Societe Generale SA see it affecting risk sentiment.
The currency is now the fifth-most used currency for global payments, accounting for about 2% of transactions, according to data from the Society for Worldwide Interbank Financial Telecommunications, which handles cross-border payment messages for more than 11,000 financial institutions in 200 countries. While that’s still a small share, when Swift first started tracking currencies in this way in 2010, the renminbi was ranked 35th.
Of course, the investor frenzy for all things China comes with a big caveat: Those flows could push the yuan to strengthen too far, too fast, and precipitate government intervention to stop gains hurting exports. Officials have historically advocated for a weaker currency to support manufacturers.
Indeed, Citigroup Inc. is predicting the currency could soar to its strongest in almost three decades versus the dollar in 2021, Goldman Sachs Group Inc. forecasts a rise to levels unseen since 2015, and JPMorgan Chase & Co. describes bets on the renminbi as one of its “highest conviction” picks for this year.
It wouldn’t be the first time that officials have acted to stem appreciation. In 2015, Beijing unexpectedly devalued the currency, triggering the yuan’s biggest one-day loss in 20 years. So far, China’s central bank has only moved to slow, rather than halt, the yuan’s advance by making it cheaper for traders to bet against the currency and by relaxing capital curbs to allow more outflows.
But if the currency rises to less desirable levels, policy makers could act more forcibly. They could also delay opening domestic markets further — a prerequisite for the yuan to become a truly global currency.
“Locally, the momentum of FX actions suggest a desire for a slower pace of RMB appreciation,” Nomura strategists including Craig Chan wrote in a December report.
Any intervention would slow not only the yuan’s advance, but also its challenge to the dollar. Despite bullish calls for the yuan from some of the finance industry’s biggest names, the median forecast is for an advance of less than 1% by the currency in 2021. That would lag expected gains of more than 3% for the ruble and over 6% for the Brazilian real, data compiled by Bloomberg show.
Dollar hegemony could also find an ally in former Fed Chair Janet Yellen, who’s President-Elect Joe Biden’s pick to helm the Treasury department. The incoming administration could once again promote a stronger dollar, rebooting a policy that had held since 1995 until fizzling during the Trump presidency.
Still, the uptick in appetite for Chinese assets suggests growing international comfort with the renminbi, and the nation’s economic outperformance is likely to drive further use — even if the greenback remains the dominant currency for trade, capital markets and reserves for some years to come.
“We are extremely bullish on emerging markets, which is fundamentally based on the view the Chinese economy will be strong in 2021 and that China has done a great job dealing with the virus,” said John Malloy, portfolio manager and co-head of the emerging and frontier market team that oversees $10 billion at RWC Partners. “There will be continued pressure on the yuan to strengthen.”
Dollar Shorts Mount Before Yellen Outlines Market-Based Policy
Investors may take Janet Yellen’s expected endorsement of a market-driven exchange rate as an additional green light for the U.S. currency’s long-term downtrend.
The U.S. Treasury Secretary-designate will affirm the U.S.’s commitment to a market-determined dollar value on Tuesday, the Wall Street Journal reported. The comments could fuel speculation authorities will not object to a softer greenback, which earlier this month fell to a two-year low against its major peers.
Investors are already doubling down on wagers that stand to profit if the currency weakens further, emboldened by an incoming Democratic administration that is prepared to unleash more fiscal stimulus to help the economy recover. The bets come despite a reprieve over the past few weeks that has driven the Bloomberg Dollar Index higher along with Treasury yields.
“We interpret Yellen’s view to mean the U.S. government is unlikely to stand in the way of an ongoing market-driven dollar depreciation,” said Rodrigo Catril, currency strategist at National Australia Bank Ltd. in Sydney. There’s “no challenge to the current dollar downtrend.”
Hedge funds boosted net short positions to the highest in nearly three years in the week through Jan. 12, according to data aggregated from the Commodity Futures Trading Commission. Meanwhile, they raised bullish bets on the pound to the most since October, and are wagering on the euro and the Australian and New Zealand currencies to rise.
The U.S. adopted a policy of favoring a “strong” dollar in 1995. While the mantra evolved from one Treasury chief to another, no administration from then until the Trump years communicated, as the president did in 2017, that the dollar was “getting too strong.”
“This is not the same as the strong-dollar policy of the past,” Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd., said of Yellen’s expected upcoming remarks. “A commitment to market-determined exchange rates implies that the new administration will be comfortable with further dollar weakness.”
While the dollar’s recent gains have spurred talk of a sustained rebound, Goldman Sachs Group Inc. and investors in a Bank of America Corp. survey remain steadfast in forecasting a weaker greenback. The Bloomberg Dollar Spot Index has climbed more than 1% from a low in January, extending gains to touch a one-week high on Monday amid fading global risk appetite.
“We continue to believe that the combination of high dollar valuations, low nominal and real rates, and a rapid recovery in the global economy will weigh on the greenback throughout 2021,” Goldman strategists including Danny Suwanapruti wrote in a Jan. 17 note.
Options prices also suggest the bounce back in the dollar is in its final stages. The spread between one-year and one-month risk reversals, a gauge of market sentiment, has again turned negative — a pattern that has preceded a fall in the spot market multiple times since September.
“The dollar is still likely to move lower over the course of the year,” Seamus Mac Gorain, head of global rates at JPMorgan Asset Management, said in an interview last week. “Many of the currencies which are more levered to global growth, particularly emerging market currencies” and the Aussie are set to strengthen, he said.
Global Food Prices At Six-Year High Are Set To Keep On Climbing #GotBitcoin
Global food prices reached a six-year high in December and are likely to keep rising into 2021, adding to pressure on household budgets while hunger surges around the world.
A United Nations gauge of food prices has jumped 18% since May, as adverse weather, government measures to safeguard supplies and robust demand helped fuel rallies across agricultural commodities from grains to palm oil. Prices will likely climb further, the UN’s Food & Agriculture Organization said.
The spike threatens to push up broader inflation, making it harder for central banks to provide more stimulus to shore up economies, while stirring memories of food-price crises a decade ago. It’s bad news for consumers whose incomes have been hurt by the Covid-19 crisis, and adds to concerns about global food security that’s being affected by conflicts and weather shocks.
That’s especially true for the poorest countries having to contend with limited social safety nets and purchasing power, according to the FAO.
“We do at this point see more factors pushing up global food prices,” said Abdolreza Abbassian, a senior economist at the FAO. “Food inflation is a reality. While people have lost income, they are as we speak going through a tremendously difficult hardship.”
Corn and soy futures rallied to six-year highs as drought threatens crops in South America at a time of surging Chinese demand, while palm oil — used in about half of all supermarket goods — is near a 10-year high. Protectionist measures are also propping up markets, with Argentinian farmers planning a protest strike after the government suspended corn-export licenses, while wheat giant Russia will curb grain exports from mid-February to tame food inflation.
Commodities priced in dollars — often seen as a hedge against inflation — should remain supported as the greenback falls further this year, Abbassian said. Plus, an economic recovery in some parts of the world will probably fuel consumer spending and food demand, with weather risks and export restrictions from some grain suppliers aiding prices in the short term, he said.
Weather concerns, government intervention and strong exports to China could push agricultural markets higher this year, according to Rabobank International. Soy prices have become expensive enough that the world will need to ration demand, Joe Stone, head of crop merchant Cargill Inc.’s agriculture supply chain and corporate trading, said this week.
The FAO’s food price index has risen for the past seven months, with annual prices capping the highest average in three years. Still, costs remain well below peaks in 2008 and 2011, when soaring prices caused political and economic instability around the world and grain-export bans tightened supply.
“Commodity price inflation is very real, but we’re still nothing like a decade ago,” said Tim Benton, research director in emerging risks at Chatham House in London. “I am reasonably confident that it’s not going to lead to big things as per a decade ago. But still, Covid has the potential to upset things in terms of flows of goods, in terms of access to labor.”
The Chapwood Index
The Chapwood Index reflects the true cost-of-living increase in America. Updated and released twice a year, it reports the unadjusted actual cost and price fluctuation of the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities in the nation.
The Real Cost of Living Increase Index
It exposes why middle-class Americans — salaried workers who are given routine pay hikes and retirees who depend on annual increases in their corporate pension and Social Security payments — can’t maintain their standard of living. Plainly and simply, the Index shows that their income can’t keep up with their expenses, and it explains why they increasingly have to turn to the government for entitlements to bail them out.
It’s because salary and benefit increases are pegged to the Consumer Price Index (CPI), which for more than a century has purported to reflect the fluctuation in prices for a typical “basket of goods” in American cities — but which actually hasn’t done that for more than 30 years.
The middle class has seen its purchasing power decline dramatically in the last three decades, forcing more and more people to seek entitlements when their savings are gone. And as long as pay raises and benefit increases are tied to a false CPI, this trend will continue.
The myth that the CPI represents the increase in our cost of living is why the Chapwood Index was created. What differentiates it from the CPI is simple, but critically important. The Chapwood Index:
* Reports The Actual Price Increase Of The 500 Items On Which Most Americans Spend Their After-Tax Money. No Gimmicks, No Alterations, No Seasonal Adjustments; Just Real Prices.
* Shines A Spotlight On The Inaccuracy Of The CPI, Which Is Destroying The Economic And Emotional Fiber Of Our Country.
* Shows How Our Dependence On The CPI Is Killing Our Middle Class And Why Citizens Increasingly Are Depending Upon Government Entitlement Programs To Bail Them Out.
* Claims To Persuade Americans To Become Better-Educated Consumers And To Take Control Of Their Spending Habits And Personal Finances.
The inaccuracy of the CPI began in 1983, during a time of rampant inflation, when the U.S. Bureau of Labor Statistics began to cook the books on its calculation in order to curb the increase in Social Security and federal pension payments.
But the change affected more than entitlements. Because increases in corporate salaries and retirement benefits have traditionally been tied to the CPI, the change affected everything. And now, 30 years later, everyone knows the long-term results.
Ask anyone who relies on a salary or Social Security or a pension and he’ll tell you his annual increase in income doesn’t come close to his increase in expenses. What comes in is less than what goes out — a situation that spells disaster for average Americans.
* The data solidly supports what many Americans have suspected for years. The CPI no longer measures the true increase required to maintain a constant standard of living. This is the main reason that more people are falling behind financially, and why more Americans rely on government entitlement programs.
Chapwood Index Founder Ed Butowsky
Butowsky began calculating the Chapwood Index in 2008. Using social media, he surveyed his friends across the country to determine what they bought with their after-tax income. He narrowed the list down to the most frequent 500 items and asked his friends in America’s 50 largest cities to check the prices on those items periodically. The Index shows the fluctuation in each city in the cost of items such as:
Starbucks coffee, Advil, insurance, gasoline, sales and income taxes, tolls, fast food restaurants, toothpaste, oil changes, car washes, pizza, cable TV and Internet service, cellphone service, dry cleaning, movie tickets, cosmetics, gym memberships, home repairs, piano lessons, laundry detergent, light bulbs, school supplies, parking meters, pet food, underwear and People magazine.
The Index forces middle-class Americans to recognize that their dependence on income increases pegged to the much-lower CPI virtually guarantees that they will run out of money before they die, because people are living longer and there is a huge difference between the CPI and the real world.
As an example, the CPI rose 0.8 percent in 2014. But in Boston, the Chapwood Index shows that the real cost of living increase was 10.7 percent. This means that if you work in the Boston area and got an 0.8 percent raise in your salary, it wasn’t nearly enough to cover the increase in your day-to-day expenses.
The unintended consequence of the CPI is that people who depend on Social Security and pensions don’t get what they need. Our hope is that people will review the Index, see what the real cost of living is where they live and understand that it leaves them exposed, and consult with a financial adviser to plan for the future.
It was especially bad in San Jose, CA , where the Chapwood Index shows a 13.7 percent rise in the cost of living. Even the city with the lowest increase, Colorado Springs, CO , showed a 6.6 percent rise, a 5.8 percent higher than the CPI.
So, wherever you live, you showed a higher income. But at the end of the year, you spent all of it — and more.