Are the planets aligning against the US dollar?

I am growing concerned that the dollar may have some issues
Could there be problems for the US dollar in the future?

Note: I am not saying the US dollar will collapse, but we need to reassess our perma-bull strategy.

I just wanted to send out a note to my followers regarding the US dollar.

In light of recent events that I have been analyzing, I am beginning to grow concerned about the integrity of the US dollar going forward. I am taking note that we may see a timeline similar to the dollar’s action during the 2007-2008 economic swoon – even if the fed funds rate stays at an elevated level.

Let’s take a look at the trade-weighted US dollar index since 2000.

Despite the US Fed raising short-term rates last decade, its misguided policy caused the dollar to fall. Investors anticipated problems, disregarded the higher Fed funds rate, and sold the dollar

Let’s take a look at the Fed funds rate over the same timeline.

The value of the US dollar index is traditionally closely related to the Fed funds rate, but there are new concerns that may sever this direct relationship
Four troubling and growing issues that concern me

What I am concerned about here is four fold;

One; Federal Reserve policy seems to be irrational in some respects. While most people are getting caught up with the increase in the interest rates, I’m more concerned about the autopilot reduction in the asset balance sheet. The Fed is not pausing to assess what they have done so far. It seems anxious to unwind quickly.

The Fed balance sheet unwind – A long way down

The extra market supply of US treasuries and mortgages from the autopilot balance sheet unwind are only compounding the potential problems caused by the higher rates. This could adversely impact the other credit markets. While US treasuries may hold up in value they are going to continue crowding out efficient private funding.

Two; Political problems seem to be growing here domestically and the political friction between the executive branch and the Federal Reserve itself is totally unprecedented. President Trump is painting himself into a corner and the showdown may grow more heated.

Three; The third item is that the Federal Reserve does not really seem to care about what is going on. It is being willfully ignorant to problems such as:

  • the manufactured trade problems,
  • distortions in the other credit markets caused by the quick tightening of monetary policy after seven years of free money,
  • Asset price volatility. It has not even begun to address the stock market swoon. Unless the trends turn around we are now entering a bear market in equities.

Four; Moreover the ex-fed Chiefs continue to comment on the financial markets and their price levels.

Conclusion

Foreigners are noting these issues and I submit that we may begin to see foreign money run to the exits. If asset values here in the United States continue to fade you’re going to see pressure on the dollar as many foreigners will take their dollars and convert them and get out of here.

At this point, I am not yet saying the US dollar is toast. It may seem like a rather elaborate investment thesis and I may be only paranoid, but I think it is rather straightforward at this point. This is something that we need to consider.

In aggregate, global investors have been bullish on the dollar for some time. In a linear environment, higher rates support the dollar. But, if policy moves too far away from what would be considered prudent under current circumstances, we could have problems. For those in the United States I do not think this will be an issue, but to those foreigners with an overexposure to the US dollar-based asset market, it could become a problem.