The Strong Dollar Trade Is Crowded With Fools

 | Jan 31, 2017 | 12:00 PM EST
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Every commentary I read about the dollar goes like this: Trump is going to reflate the economy and that is going to drive inflation higher and the Fed is going to raise rates and the dollar is going to go up.

Same commentary. Every time. From every commenter. I guess they all think that they stumbled onto something that nobody else thought of. Some new "fundamental."

There are two problems with this. The first is, when everyone believes the same thing for the same exact reasons, then you can pretty much bet that the market has discounted this view already.

The second problem, and this is more fundamental, is that the view is wrong. The understanding of economics is wrong. Rate hikes are not bullish. They are price increases. They raise the price level of all things and are thus inflationary. Inflation is not good for a currency; it's terrible for a currency. Inflation literally means your money is worth less, not more.

Furthermore, fiscal stimulus is money printing. It's real money printing, not like the fake money printing that all the "inflationista's" thought was happening when the Fed was cutting rates to zero and buying assets. That was the money printing that never was. That's the inflation that never happened, but they had no clue. They were ignorant to the realities. Fiscal stimulus, on the other hand, is real "money printing," but they still don't get it. They're saying it's bullish for the dollar.

I actually heard a widely followed analyst say that Trump's border wall will be bullish because it will create demand for cement and building materials and that will create demand for dollars. This is a widely followed analyst saying something as ridiculous as this! Well, guess what? Even if this were true, demand for dollars is met by supply of dollars. That's what happens when the banking system creates deposits in the act of lending. Or, when the government simply "prints" the dollars to "pay" for whatever it is that it has to pay for.

This is a total lack of understand and it is junk economics and junk analysis. It's malpractice as far as I am concerned.

I hear people telling me that the yen is going down because the Fed is going to raise rates. Here we go again. Meanwhile, we've already had two rate hikes in the past year and the yen is up 10%, against the dollar. You got that? It's up, not down. Same with the euro. Same with the Aussie dollar. Same with the New Zealand dollar. Even same with Canadian dollar. And the only reason the dollar is up against the British pound is because misinformed people sold the pound for the wrong reasons after Brexit. I am here to tell you the pound will recover, too. Don't worry.

Back in 2009, when everyone was saying the dollar was going to crash because the Fed was taking rates down to zero and they were "printing money" (NOT) and doing quantitative easing I said that the dollar was going to go on a long-term uptrend. I even made a video about it at the time. Who was correct? I was. The dollar was supported by what the Fed was doing. Stripping the economy of interest income was deflationary. Setting rates at zero was deflationary. This is one of the reasons why we never got GDP growth above 3% in any of the years that the Fed was conducting this so-called "stimulus."

On the flip side, it's also the reason why we see inflation at two-year highs or higher now, even after two Fed rate hikes over the past 13 months, and why gold is higher and why commodities are higher. Wait until you see how high inflation will be after the three proposed rate hikes that are forecast for this year. We're talking gold at $1500 and the dollar index in the 80s. Oh, and dollar/yen? You're probably looking at somewhere in the 90s on that one.

Folks, when everybody believes the same thing for the same reason and the reason is wrong, that's a crowded trade, and it's a crowded trade filled up with fools. It will be fun to watch what happens to them.

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