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A Bear Market in the Woods

Don't worry guy, you'll hit watch week next year.

To hear global investors tell it, the US dollar is the absolute worst currency … except all the other ones out there. So, what’s driving its rise when most Americans don’t even want a strong currency?

Europe is on the brink of recession and lacking any good way to avoid it, EU governments seem to be just leaning into it. By one major index, the Euro-zone’s economy shrank in August.

To step on yet another maxim, evidently when China sneezes, the rest of the hemisphere gets Covid. Asian economies are also losing steam as China faces sluggish export growth and a crippled property sector. Japan. South Korea and Taiwan have all seen both industrial output, as well as the value of their currency fall.

Then there is America – that shining greenback on the hill. With the Fed’s interest rate hikes, the stable, if boring dollar, has become a high-yielding currency whose government, despite the late unpleasantness, isn’t likely to have a destabilizing coup. This is likely a Flight to Safety. The downside for the US is that it makes American goods more expensive at a time when its economy is slowing (and traditionally the time the Fed cuts rates). On the other hand, if you are pricing villas in Sardinia, then this is the time to buy.

The downside globally is that most foreign loans are borrowed in dollars, which is likely to put a squeeze on global credit.

The dollar likely won’t come off its lofty perch until there is a narrowing the global growth gap, a reduction in wage and price pressures in the US, and a decline in global energy prices. The first two will take some time, the last will as well, if for completely different reasons.

Fed chief Jerome Powell isn’t cutting rates, and has said, “fighting inflation will bring some pain.” And how. In doing so managed to up end the classic diversity bond model wherein corporates and government bonds move in different directions and act as each other’s hedge. Now they’re both being clobbered, leading to the first bear market in bonds in decades.


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