Felix Zulauf: There is a Dollar Shortage

In this week’s Barron’s, we get the second part of the semi-annual Roundtable and global macro investing legend Felix Zulauf kicks things off with a fairly dire outlook. He’s been dire for a while now (as all macro people must be), so that’s not the news. What I did find interesting was his outlook for the US dollar, and his explanation about how nobody truly understands why it’s been rallying…

Zulauf: Mainstream economists are telling us that the dollar is strong because of growth differentials among countries, and an impending interest-rate hike in the U.S. They don’t understand the true reasons for the strong dollar.

Enlighten them, and us, please.

Zulauf: The Federal Reserve, under [former chairmen] Alan Greenspan and Ben Bernanke, pursued a monetary policy that kept interest rates too low. It weakened the U.S. currency, which became a funding currency around the world. Corporations issued dollar-denominated debt. According to the Bank of International Settlements, there is $9 trillion of dollar-denominated debt outstanding in the private sector around the world. That is the short position. Whatever the reasons for the recent firming of the dollar, the true firming eventually will occur when all issuers of dollar-denominated debt see their liabilities rise. They will have to hedge their positions and buy dollars, creating demand for the dollar.

At the same time, the current account deficit of the U.S., which is the way the U.S. supplies dollars to the rest of the world, has been shrinking in recent years. Therefore, there is a diminishing supply of new dollars. At some point this year, the market will realize that interest-rate hikes in the U.S. are off the table. When that happens, the dollar will have a correction. I expect that correction to start in the first quarter and end before midyear. Then, the dollar will strengthen again, probably into late 2016. I don’t want to buy U.S. dollars at today’s level, but an investor who wants to establish a dollar position should do so in phases as the dollar corrects.

Source:

22 Smart Investment Ideas (Barron’s)

 

Josh here – one other observation I’ve made, which may or may not be connected to this but is interesting nonetheless: Since the beginning of this year, gold has broken its inverse correlation with US dollar strength and has begun rallying with the greenback. My interpretation is that this is not an “economic” phenomenon. Rather, I believe it represents pure fear, or the reintroduction of pure fear, anyway.

My chart below:

Screen Shot 2015-01-24 at 8.24.01 AM

 

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. fake gucci watches commented on Sep 18

    … [Trackback]

    […] Find More Info here on that Topic: thereformedbroker.com/2015/01/24/felix-zulauf-there-is-a-dollar-shortage/ […]

  2. Bitcoin Evolution Review commented on Sep 23

    … [Trackback]

    […] Find More Info here to that Topic: thereformedbroker.com/2015/01/24/felix-zulauf-there-is-a-dollar-shortage/ […]