“IF THE US DOLLAR BREAKS OUT ABOVE ITS 2015 HIGH, WON’T THAT BE UBER DEFLATIONARY?”
That’s a great question, and largely lost on establishment media, says Hedgeye CEO Keith McCullough in response to a subscriber’s question on The Macro Show today. “If you get the dollar right, you get the rate of change in inflation right, and you get deflationary risks right.”
Investors should be aware of the risks to owning assets priced in dollars. Essentially, a stronger dollar makes it that much more costly for foreigners to buy or service assets/debts priced in dollars.
In other words, heads up.
For the record, countries around the world have loaded up on an astonishing $9 trillion in US-dollar denominated debt. That’s extremely risky in a strong dollar environment. So too are commodities like oil, since they are also priced in dollars.
Let’s review the recent effects of a strengthening dollar:
- The U.S. dollar index is up +4.6% since Trump was elected (performance since late November 8th) and +5.6% in the past 3 months
- Over that same period, Emerging Markets (EEM) are down -7% and -7.8% respectively
“It’s the lead domino in the deflation of asset prices,” McCullough says. “The U.S. dollar breaking out from here is ‘uber deflationary.’ Those are the right two words to use.”
Hedgeye Senior Macro analyst Darius Dale added:
“It’s a double whammy. Not only are debt servicing costs rising when the dollar breaks out but all the empirical evidence shows currencies break down versus the dollar and the incremental supply of portfolio investment, particularly fixed income markets, dwindles. So not only do you have an issue with existing debt service but you also have a problem with incremental credit which brings on higher levels of default risk and sharper slowdowns credit allocation, which is also negative.”
Don’t fall into the herd’s complacency.