HedgeTalk: A Dollar Demise? Not so Fast!
By: Johan Rosenberg, Chairman
The long term dollar holds the key to spreads, and asset valuations. The United States does receive significant benefits from a reserve currency across the globe, with 60% of global currency reserves held in U.S. dollars. While other countries have employed stimulus in the form of printing excess money supply, none have done as much as the U.S. has, and thus, relatively speaking, the dollar continues to weaken. The DXY dollar index is a global liquidity barometer. The weaker the index is, the more momentum and power there is to the bull run in equities. The Chinese currency is ascending and the U.S. dollar descending, but ever so slowly. There is no doubt that China’s growing influence is a threat to the U.S., but the yuan is not quite yet ready to challenge the dollar as a reserve currency, with total global reserves held in yuan still only at 2.00%. The belief that the U.S. is a capitalist society still holds true, but this long held belief is weakening with all the stimulus support provided in response to the COVID-19 Pandemic in comparison to China. While the Chinese are trying to purge ‘Zombie Companies’, the U.S. is supporting ‘Zombie Companies’ by buying up their crappy debt with newly printed dollars and funding by selling more Treasuries. The Chinese Central Bank has a positive risk-free rate, which allows investors to evaluate investment opportunity by discounting future cash flows. The U.S., On the other hand, is too fearful to have investors discover fair value and prefers all asset classes to bubble-up. It’s interesting to see that China is what we once were, truly capitalist. If the U.S. were to lose its reserve currency status, what does that mean for U.S. asset prices? Can that happen anytime soon? Unless you believe in a rapid U.S. dollar collapse, the slow progression toward not being the world’s reserve currency will take many years, interlaced with much volatility. Overall, due to the pandemic, I can imagine deglobalized supply chains and evolutions to digital payment systems, including cryptocurrency technologies, increases in other than U.S. dollar-based currency reserves, causing a gradual decrease in demand for pure U.S. dollar assets like U.S. Treasuries. In the short run, however, mean reversion for the U.S. Dollar, is more likely than a continued descent. The other purely U.S. dollar denominated asset class are muni’s, a second derivative to Treasuries and they offer only slightly worse principal protection, but still protection. Cities die very slowly. Even though there is still some yield in muni’s, rates and spreads really can’t go much lower. Thus, upside appreciation is limited. On the other hand, U.S. exchange traded multi-transnational companies can achieve profits globally and report positive currency converted U.S. dollar denominated margins. The equity markets may very well be the only pace to earn any yield. I believe that we are currently in a dollar bear market, which will soon turn. It may even happen sooner than we think with the incoming Biden Administration. Biden could reap the benefits of Trump’s “America First Seclusion-ism” as he returns the U.S. to a more traditional role as an inter-twined global meddler and policing power. Also, the European central powers and the Chinese have signaled a willingness to devalue their currencies to support exports, which relatively speaking, would strengthen the U.S. dollar. Finally, with pending volatilities ahead for gold and precious metals, a store of value for centuries, as currencies and empires have fallen, will continue to hold their own.
Johan Rosenberg tracks global economic events, and specific capital markets, in order to advise clients and offer solutions to large complex tax-exempt and/or corporate debt issuances and hedging products. Here is an Appointment Scheduler for a 45 Minute conversation with Johan. To learn more about specifically hedging, contact a HedgeStar advisor firstname.lastname@example.org about how to integrate currency and commodity hedging programs into your risk management framework.
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Johan Rosenberg, Chairman