- February 13, 2017
- Category: Currency
American Bullion remains skeptical of the prospects for the U.S. dollar. While it remains true that the dollar’s value depends on a huge number of factors—and its resilience has surprised in the recent past—most major economic indicators appear to work against a stronger dollar in 2017 (and beyond).
The U.S. dollar remains the world’s most recognizable and widely traded currency, but its status as a symbol of strength continues to wane. New pressures, both domestic and international, should apply downward pressure on the dollar in forex market.
Americans may rightly worry about the dollar’s reserve-currency status. Here are five simple reasons to believe in dollar downside:
1. The Presidential Cycle Theory
Stock market historian Yale Hirsch introduced the Presidential Cycle Theory in 2004 to describe the affect election years have on markets. Though controversial among economists and financial analysts, the model’s accuracy is surprising.
Hirsch identified four assumptions in his model:
- Markets tend to perform well in the election year (in this case, 2016)
- Markets do even better in the year leading up to election year (2015)
- Markets perform best in years three and four of any term (2015 and 2016)
- Markets perform worst in years one and two of new terms (2017 and 2018)
To put the model’s success in perspective, consider that between 1900 and 2012, the S&P 500 gained an average of 11.5% in the fourth year of presidential terms, although it is worth pointing out that the S&P 500 fell by an average of 1.2% in year eight of a two-term presidency (perhaps due to the uncertainty of incoming administrations).
Nevertheless, history suggests that the first two years of President Trump may not make many equity investors happy. Poor stock market performance normally impedes growth in the value of the U.S. dollar.
2. Trump Wants More Exports
A much more substantial obstacle to the dollar’s value—and potentially the most certain of all—is President Trump’s economic agenda on international trade.
The President subscribes to a neo-mercantilist view of foreign trade: imports hurt U.S. producers and are a net loss; exports help U.S. producers and are a net plus. This is very different than the neoliberal consensus that unfettered international trade is always positive, regardless of the composition of imports and exports.
One of the oldest ways to suppress imports and increase exports is to lower the value of a national currency. This makes American goods less expensive to foreign consumers and foreign goods more expensive to Americans.
3. Possible Bubbles in Stocks, Bonds, and Student Loans
Market analysts know valuations for equities are out of line with the fundamentals (something detailed in this article as well). The fact remains that, since 2009, stock prices have moved more or less in lockstep with the amount of new fiat money introduced by the Federal Reserve.
The bond market has its own problems with valuations, particularly in light of likely interest rate increases in the near future. When interest rates increase, bondholders are likely to see the face value of their debt holdings decline. This, in turn, could finally unwind what famous hedge fund manager Paul Singer calls “the biggest bond bubble ever.”
Lastly, the United States economy has to find some way to absorb $1.3 trillion dollars in student loans. College tuitions have exploded thanks to easy money guarantees by Sallie Mae, which means any student can borrow money they can’t repay and it is backed by the U.S. federal government. If this bubble bursts, the credit markets may lock up again.
4. Pressure from China, Russia, India, and Others
American economic hegemony hit its peak in the post-war era, when a decimated Asia and Europe looked to the U.S. dollar as a safehouse for their own struggling currencies.
That era no longer exists. It is a poorly kept secret that China, Russia, and other major countries envy the reserve-currency status of the U.S. dollar and wish to replace it with a less-Western note. If foreign central banks and businesses dump their U.S. dollar holdings, expect the value of the currency to drop dramatically.
5. Quantitative Easing and U.S. Debt Still Loom
The 800-lb gorillas in the room are 1) the still-unresolved effects of the Fed’s experimental quantitative easing programs between 2008 and 2015, and 2) the now $20 trillion national debt.
If the quantity theory of money has any validity, seven years of zero-interest rate policy and massive monetary expansion will, eventually, result in strong inflation. By definition, that means a weaker U.S. dollar.
Twenty trillion dollars in federal debt is an extraordinary number, and one that must give the creditors of the United States pause about the country’s commitment to financial solvency. As soon as our nation’s debtors no longer feel confident about the ability of the U.S. government to make good on its obligations, there could be a firesale on U.S. Treasurys and, in that event, a collapse of the U.S. dollar.
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Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.