
It’s always an easy lever to pull. Talk down one’s currency and hope that it helps exports. I guess it was just a matter of time before President Trump chimed in considering his obsessive focus on the US trade deficit. But would a weaker dollar really help the US economy? Exports are only 12% of US GDP. Consumer spending, that would suffer from a weaker dollar via lower purchasing power and higher inflation on the 15% of GDP that we import, makes up 70% as we all know. Retailers are also the largest US employer. We also know that a huge challenge facing the middle class has been real wages that have essentially flat lined over the past few decades where a rise in the cost of living via a weaker currency would only exacerbate. I’m a proponent of neither a strong nor weak currency but a stable one and believe that we should be careful here in hoping for a weak currency (or just not a strong one which I get) Mr. President. Just look at the experience of Japan where consumer spending remains punk and the weak currency hasn’t led to any noticeable impact on export volumes. Export volumes are no different today than they were in 2011 when the yen was trading at 75-80. The market response to the DJT comments are as expected with the dollar index trading at a 2 week low. There are also equity implications here too as the Nikkei closed at a 4 month low and the DAX is at a 2 ½ week low.
Also of note in response to the dollar comment, the implied US inflation rate yesterday 5 and 10 yrs out each rose 2 bps with the 5 yr at 1.88% and the 10 yr at 1.92% and both are up slightly this morning. They are still off about 15-20 bps from their January highs but remain well above last year’s lows. Nominal yields broke hard on the ‘I like low interest rates’ comment and questions about tax reform because how will it be paid for with questions on BAT, especially if Trump doesn’t like a strong dollar but if the dollar actually sustains a notable drop here, that is potentially a big negative for long term bonds. And remember, foreigners, who have been huge sellers of US Treasuries over the past few years, will only pick up the pace. Thus, sell this bond rally I believe.
With respect to gold and the unofficial/official Administration endorsement of a ‘not strong dollar’ in addition to every other single country in the world who also wants a weak currency, I’m upgrading my view point on gold and silver from buy to pound the table buy. Both are now above their 50, 100 and 200 day moving averages and at a 5 month highs.
Gold (GLD):
Silver (SLV):
Bottom line, wanting a weak dollar that would raise the cost of living on a consumer spending dependent economy and continuing with artificially low interest rates that only encourages leverage and discourages savings won’t MAGA, it would just be more of the same. I completely understand the desire to improve the macro environment for US manufacturing and the jobs associated with it but I’d prefer to see that happen via tax and regulatory policy that would MACA, Make America Competitive Again.
For more detail on how I’m positioned in dollar, gold, silver and bond related equities and ETF go to the Ideas Page