Peter Schiff: The Dollar Is in a Bear Market Rally – It Won’t Last
The US dollar has rallied over the last few weeks. The dollar index closed above 93 on May 8. This represents about a 5% increase from the low this year of just above 88. On the year, the dollar is up about 1%, although it is still off about 6% from its highs in 2016.
In his latest podcast, Peter Schiff called this a “bear market rally.”
There hasn’t been any good economic news that would explain the strength of the dollar.”
In fact, as Peter pointed out in his previous podcast, dovish Fed comments and their apparent willingness to “tolerate” inflation above 2% would normally be perceived as negative.
The economic data, the jobs numbers that came out last week – much weaker than expected. So, all the information would actually argue against a more aggressive Fed, in favor of a more dovish Fed. Yet the dollar is rising anyway. I think it’s technical. I think it’s short-covering. And in fact, I think it’s very short-sighted.”
Peter pointed out that the real dollar strength is against emerging market currencies. This is problematic because it is putting even more pressure on their already increasing inflation rates. Politicians in these emerging markets are resisting raising interest rates which would help combat increasing inflation and support a weakening currency. This unwillingness to act is adding fuel to the fire.
The irony is currency traders are missing the bigger point. America is fundamentally no different.
The United States is in the exact same predicament, only worse than the emerging economies. Because we are going to be faced with the same set of dynamics in that we are going to have rising inflation and a falling dollar that for political reasons the Fed will be unable to, or unwilling to raise interest rates sufficiently to put out the inflationary fire and prop up the dollar.”
In fact, the Fed has already admitted inflation is going up and that it’s willing to tolerate some “symmetric” rise above 2%. The central bankers just haven’t acknowledged that it’s ultimately going to go up far above 2%.
Peter said this bear market rally is an opportunity for investors to add to dollar shorts, to get into emerging economies, and add gold to your portfolio.
Obviously, the gold market is being suppressed a bit by the strength of the dollar, but as the dollar surrenders those ill-gotten gains, that is going to be particularly good for the gold market.”
He also noted the spiraling amount of government spending. The federal government is running around $100 billion per month deficits.
And that’s in supposedly good times, right? A booming economy. What’s going to happen to those deficits the next time we’re in a recession? I mean, not only are we going to hit $2 trillion, but we could be closer to $3 trillion than $2 trillion. And obviously, when inflation really starts to pick up, we’re in the same predicament as any emerging market, because we can’t raise interest rates because we’d be dead. The economy would implode. The stock market, the real estate market, the bond market, everything would hit the fan. The cost of servicing the debt would explode.”
When interest rates go up, it doesn’t just impact new borrowing. It affects the entire national debt because the bonds are short-term. They mature and have to be rolled over. That means they are refinanced at the higher interest rate.
We have to reborrow. We have to constantly refinance the money we borrowed in the past because people weren’t dumb enough to loan it to us for 30 years. They loaned it to us for 30 days. And so we constantly have to roll this stuff over. So, this is going to be a much bigger problem. So, as weak as the emerging market currencies are right now, the US dollar is going to be even weaker when the traders figure it out. When the dollar reverses and starts going down, and that weakness in the dollar fuels the inflationary fire, when oil prices are even stronger, when other commodity prices are even stronger, and the US economy is slowing down, and the Fed is now not raising interest rates that is when the money is being pulled out of the US.”
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