Global assets to adjust to USD weakness
For the past several years, I get the entire team in Hong Kong for a few days for our annual offsite. It is the best thing we do as a firm, because we have people on four continents and it is the only time everyone has a chance to discuss their alternative views face to face. I am blessed to work with some really smart people who bring diverse thinking and skill sets to my firm. I also hosted a CIO dinner on this week in HK. Again, a collection of the smartest folks in Asia. The only difference, no real diversity in thinking. The overwhelming consensus is that very little can go wrong for financial assets in the near term. Stocks are bullet proof and the USD can’t and won’t rise in the medium term.
A warning sign? Historically yes, but just because it is the consensus, does not mean it is wrong. Anyway, what does a couple of percent correction in the USD or equities mean, regardless of when it happens? Big picture, nothing. We are already starting to see the idea of a one way, melt up evaporating in the EU and Japan as currency strength starts to eradicate this notion. While few would argue the index benefits for US stocks of USD weakness, global equity investors are starting to witness a few cracks. That said, I see very little on the horizon outside of a significant inflation scare that will prevent non-US equities, especially emerging markets from finishing the year considerably higher than they are today.
Near term, the relative performance of equity markets will be determined by the strength of their underlying currency. With the USD technically broken against many G10 currencies, equity and credit markets are yet to adjust. The arguments that USD weakness is predicated on a structural overexposure to US assets will see flaws in this argument emerge as US equity outperformance continues. If investors were worried about US exposure, equities and the USD would fall simultaneously, and this simply isn’t happening. Japan and Germany to lag. EM fine.
Equally flawed in the near term is my thesis about interest rate differentials eventually supporting the USD. I am early and wrong on this, and while I am convinced that the buying of treasuries will re-emerge as inflation doesn’t return and positive carry is sort after, it doesn’t matter at the moment and the momentum pushing the USD down a hill is relentless. Throw in the Trump/Mnuchin Davos one/two punch and the USD appears to be heading to the canvas despite some flawed arguments why. I am not changing my stance that European rates are far too low versus the prevailing level of the Euro, but I am accepting that the dollar’s slide has a relentless momentum. I think many of the arguments for weakness are defective, but prices don’t lie.
The Fed meets this week. On Tuesday, EU GDP, US Consumer Confidence, and Japan releases Jobs. On Wednesday, Japan Industrial Production, Australian CPI, Canadian GDP. On Thursday, Germany, Canada, China, Japan, South Korea, the EU, US and UK print PMIs, the US ISM, South Korean CPI and Australian Building Approvals. On Friday, the US Payrolls, U. of Mich. Sentiment and Durable Goods Orders.
Founder, View from the Peak
IND-X Advisors Limited