After a lengthy stay in the land of Oz down under, where one has a very different point of view, a return to a new situation that is still very much the old situation is enlightening…..
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The Dow Jones went over the 20,000 hurdle due to euphoria thanks to Trumponomics while the US dollar strengthened even more even though the US national debt is nearing US$ 20 trillion and the trade deficit continues at US$ 40 to 50 billion per month. With equity prices and the dollar so high, it seems that it would be a good idea to sell US dollar equities now and move into another currency, thereby hedging against a dollar decline. Might Wall Street and the dollar go even higher? The answer is that that is possible, but at some point reality will overweigh optimism. The fundamentals have not yet changed.
The proposed infrastructure expenditure of $ 1 trillion will have to be financed by the Treasury. The Fed (Federal Reserve Bank) will be buying government paper and swelling its balance while it puts even more liquidity into the economy. The result should logically be inflation and a weaker dollar. At the same time China is bent on making the renminbi an important international reserve currency even if the Chinese economy suffers from grievous distortions thanks to Beijing`s policy of maintaining stability at any cost.
It is reasonable to assume that the US dollar will weaken as the renminbi becomes more widespread in international finance. The PBoC will have to issue lots and lots of renminbi to make the currency mass sufficiently large to function as an international reserve currency even if that simply means clicking on a computer keyboard. The Fed has been doing this for years.
The message for investors is that bond yields will rise as the Fed raises interest rates in 2017, and bond holders may lose more than the $2 trillion already lost on paper. One result that is to be expected is that real estate prices will rise and there will probably be a real estate bubble parallel to the stock bubble. Gold bugs will be scrambling to scrape together as much physical gold as possible as India and China continue to pile up the yellow metal. Commodities will also see higher prices as investors go anywhere and everywhere in a frantic search for profits. As for volatility, what we have now is the lull before the storm. Whether Trump will be able to stop the bond rout is a very good question. “The best-laid schemes o‘ mice an‘ men Gang aft agley, An‘ lea’e us nought but grief an‘ pain, For promis’d joy!” from To a Mouse by Robert Burns.