The Case for A Mass Exodus from the US Dollar
The S&P 500 is down from the end of May. It was dragged down by the top five companies in market capitalization, who have taken a beating lately. GOOG, FB, APPL, AMZN and MCSFT have all fallen due to a myriad of external factors. Meanwhile, consumer staples ETFs are outperforming by nearly 7% since early May.
Analysis shows manufacturing and trade are dragging markets toward a global recession. Investors know global PMIs are down. However, few realize that the trend has been negative for 13 months. This continuous downward pressure drove global investors to the United States, into the arms of the dollar. The dollar is very dependent on US asset performance given its massive negative net international investment position (NIIP), so the front end of the US yield curve plunge is not good for the USD. The story for the dollar has been: â€œas long as itâ€™s getting funded (dollars coming in), who cares?â€ If US growth is weakening, multiples come in, then foreign portfolio flows get uncomfortable and repatriate. That is a problem for the USD. The US dollar broke a major trend channel to start the week. The USD signals substantial weakness in the near-term. If the Fed does not explicitly set up an easing bias, stocks are going to get smacked, presenting a significant issue for the dollar. The next few weeks are planned with FOMC speeches to help influence market prices.Â With manufacturing and trade creating recession conditions, the Federal Reserve has to pullback significantly on its policy path. The US has ~$18T of GDP to the rest of the world’s ~$62T. Twenty years ago, monetary policy could be very focused on solely US data. That is not the case today.Â Â
The crowding in the USD presents as the opposite of 2008. Pre-financial crisis investors were flooding into emerging markets as the US data began to deteriorate, however, once the US-born recession leaked into emerging markets the flow out of emerging market currencies and back into the US Dollar was colossal. The opposite dynamic appears to be playing out today. A global trade-born slowdown is leading investors to hide out in the US. The flood out of the USD is just beginning.
Coinciding with the bear outlook on the USD, precious metals continued their surge higher on Monday. Long positions in gold and silver are recommended with analysis suggesting significant upside over the next 12 months. Like the first half of 2016, the combination of a global slowdown and a weaker USD will lead investors to flood toward metals. A historic capital shift has just begun.