It seems a many financial advisors and financial commentators are making an increasing amount of negative comments about the U.S. dollar and U.S. Treasuries. I disagree with them. I remember the 1970’s when there were many scary headlines about the end of Bretton Woods monetary agreement, Watergate, Nixon’s resignation, the U.S. defeat in Vietnam, the two OPEC oil shortages of 1973 and 1979 that severely damaged the economy, and the US embassy hostage situation in 1979 in Iran, etc.
The dollar went down in value and the economy performed poorly while inflation increased dramatically in the 1970’s. Gold went up from $43 in August, 1971 to a peak of $880 in January, 1980. The inflation-adjusted price return of the Dow Jones average was a decline of 73% from 1965 to 1982 (the nominal price return was negative 15%, about 1% a year). It seemed at times like the end of the world was coming with so much bad news.
Then things greatly improved: the dollar DXY index (after it had a Bretton Woods high of 108 in 1971) went up from a low of 84 in 1979 to 128 in 1984, 20% better than the old Bretton Woods number. Who could have imagined such an increase after the Bretton Woods treaty abrogation?
Gold dropped from $880 to the $400 range in 1984 and stayed there for 15 years before dropping to $250 in 1999.
The current climate of negativity seems incorrect because currently the U.S. economy and dollar are much stronger than in the 1970’s. I’m bearish about stocks because Price-Earnings ratios and similar ratios are too high, but I’m not bearish on the overall economy such as GDP, or employment, etc. Being bearish about stocks doesn’t mean one should be required to be bearish about the dollar.
The reason some are bearish about the dollar is because the nation’s debt load is at record highs and is rising unsustainably, assuming nothing is done to change course. However, on a relative basis, we are better off than the other major regions or nations such as Japan, China, EU, UK. The U.S. has a greater contingent capacity to reduce deficits by privatizing roads, raising taxes, and trimming defense spending than other countries, thus closing the budget deficit. The debt or monetary problems of the EU, Japan and China are far worse than our problems; also we have a better opportunity to recruit skilled immigrants who can add to the tax base.
Things were much worse in the 1970’s until Volcker’s Federal Reserve tightened in October, 1979.
I anticipate that the EU may disintegrate and China’s debt load and lack of productivity will get worse; meanwhile Japan has not found a solution to its excessive debts and money printing. The U.S. is highly likely to be the last man standing at a drinking party and is the least dirty shirt in the dirty clothes hamper. Central banks are at risk of losing credibility and power if they continue to pursue negative rate policies. Then they could reduce their activism. This could result in a pattern similar to the 1930’s when central banks did nothing to help stimulate the economy.
Since stocks are grossly overpriced (they need to drop about 50% from the peak of 2954 for the SP) then a global weakening of central banks would be deflationary and would contribute to downward pressure on stock prices.
What may happen is that China may devalue their currency thus inciting Japan and the EU to engage in competitive devaluations, thus making the dollar go higher. In turn this would make it harder for EM borrowers to repay dollar- based loans thus imposing a deflationary outcome onto EM nations.
Investors need independent financial advice about the risks of mistakenly being bearish about the dollar.