By Michael A. Gayed
"The single despot stands out in the face of all men, and says: I am the State. My will is law. I am your master. I take the responsibility of my acts. The only arbiter I acknowledge is the sword. If any one denies my right, let him try conclusions with me." -Lysander Spooner
Too often in the political realm do we hear that a strong dollar is in the best interest of America, and that a strong economy and strong currency must come hand in hand. The argument is too simplistic and ignores where inflation and growth expectations are against the backdrop of major structural macro trends.
Let us be very clear here — a stronger currency is good for some segments of the economy, but not all universally. A strong dollar makes imported goods cheaper, and exported ones more expensive. For consumers, we can argue this is a good thing. After all, much of the U.S. economy is consumption based.
The problem with this, however, is that it results in more foreign goods being bought as domestic similar items need to compete more on price. This can also be a net positive for consumers. For corporations actually selling goods, however, that strong dollar negatively impacts exports and pricing power. It is for this reason that large-scale multinational companies tend to get hurt fundamentally when a currency is appreciating due to the impact that has on overseas sales and competition from foreign goods. Inherently, that is disinflationary for the economy in aggregate and could slow down growth more broadly if consumers do not overcompensate and favor U.S. domestic goods.
On CNBC last week, I was asked about my thoughts on China warning that a strong U.S. dollar could be bad for the global economy. My response on Twitter was to file that under the “duh” category. When asked further on air, I noted that while domestically here in the U.S. we may call it King Dollar, to the rest of the world, it may actually be a tyrannical despot which is all powerful and can suppress others. This is not just hyperbole. As the world's reserve currency, what the dollar does can have enormous implications on financial markets everywhere.
To that end, the significant move higher in the dollar is likely to become a major issue for large-cap stocks which have been all the rage in the last few years. More and more companies are tapering (wow, do I hate that word) earnings expectations with negative announcements. Treasurys have held on to their strength, and defensive areas have thus far in 2015 tended to perform nicely as stocks fell, consistent with historical inter-market relationships which became out of whack in 2013 and 2014.
Our alternative ATAC Inflation Rotation /zigman2/quotes/202546180/realtime ATACX +0.05% and equity ATAC Beta Rotation funds have been rotating around some of these pulses of fear that the strong dollar is creating in various assets, remaining in defense mode into the second quarter.
That defense playbook I believe is going to matter more and more. Look below at just how extreme the dollar's move has been relative to history. The U.S. dollar index below is an index of the value of the United States dollar relative to a basket of foreign currencies.
The speed of the move is disruptive and has not yet been fully appreciated. These things take time time to filter. While we may live in the day to day of market movement, the ramifications of King Dollar the Despot have not yet fully been felt, and may only begin to filter through to the economy in the second quarter. It is this lag which myopic market participants are unable to see yet, because it is still to come.
And while the media focuses on the endless debate over when the Fed will raise rates, directly in front of us is the King sharpening his sword.
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