The bobbleheads on Wall Street will tell you that the U.S. dollar is going higher.
But they’re wrong. Big-time.
And you can consider placing your bets now for when the long-dollar trade blows up in their faces.
So why do they think the dollar is headed higher? Rate hikes.
The U.S. Federal Reserve is signaling at least two 25-basis-point rate hikes before the end of this year. Heck, maybe more. Boston Fed President Eric Rosengren said the central bank should raise rates three more times this year.
Higher rates mean that Treasuries pay more interest. So you can get more interest on bonds denominated in U.S. dollars than in, say, euros.
That’s the theory. But other forces can push currencies around, too.
Let me point out three horsemen bearing down on the greenback right now …
Reason #1: Trump’s Tax Reform May Not Fly. The dollar is rising on optimism that tax cuts proposed by President Trump will sail through Congress. Those cuts, in turn, will stimulate business and boost the economy. Economic growth boosts the dollar.
Not so fast! The conservatives in Congress will balk at raising the deficit. More on that in a minute. So that means we need spending cuts to match the tax cuts.
There isn’t that much to cut. There’s the Defense budget, and Trump proposed raising defense spending. That leaves Social Security and Medicare.
So basically, the way to get tax cuts is to cut checks to Grandma. And Grandma votes. Grandmas vote in disproportionate numbers. Any Congressman who votes to cut Social Security might as well place a metaphorical gun in his mouth and pull the trigger.
Unless Trump has some miracle in his back pocket, tax cuts could be in trouble. That’s bad news for the dollar.
And speaking of the budget …
Reason #2: Watch Trump Bang His Head on the Debt Ceiling. Even if Trump changes nothing, he’s still going to bump up against the debt ceiling. It’s set to expire on April 28.
Do you remember when there was a battle over the debt ceiling in 2011? The government shut down briefly. It triggered the first U.S. debt downgrade in history. It also helped send gold to $1,900 an ounce.
We also narrowly avoided a government shutdown in 2013. Here’s where it gets interesting.
The hot-heads opposed to raising the budget ceiling in 2013 were in a group called the "Shutdown Caucus." One of the members of that caucus … was a guy named Mick Mulvaney.
Fast-forward. Now, Mulvaney is the Director of the Office of Management and Budget. In other words, he’s the head of the agency that prepares the federal budget.
I think Mulvaney might end up like the dog that finally catches a car. What the heck is he going to do? Propose big cuts to Social Security and Medicare? Good luck with that, Charlie.
If the government shuts down … and if the government balks, even briefly, at paying its debts … then this throws the full faith and credit of the U.S. government in doubt. As a debtor nation that depends on other countries buying our bonds, this is juggling dynamite.
Such a move would also kneecap the U.S. dollar.
Now let me show you one more thing that tells me the dollar is in trouble.
Reason #3: Dollar Downtrend. Here’s a chart of the greenback …
Lower highs and lower lows mean one thing — a downtrend. That’s what the dollar is in now.
I’m not saying the dollar is doomed. YOU can make that argument, but I don’t believe the world will get rid of its reserve currency overnight. I’ve marked strong support for the dollar on the chart. Maybe it will visit that level. Maybe it will bounce for other reasons.
This downtrend is happening despite anticipated rate hikes. So maybe ask yourself, what if the Fed doesn’t hike rates? What will the dollar do then?
Sure, we’ve had some good news on consumer confidence and manufacturing. But that’s the icing on a pretty disappointing economic cake.
For example, FactSet tells us that over past three months, first-quarter earnings dropped by 3.6% while the S&P 500 itself actually went up 5.8%.
To me, that sounds like a disconnect from harsh reality. One that could run headlong into the Woodchipper of Disappointment for all sorts of reasons.
Bottom line: The dollar is trending lower — even as gold is trending higher. What I’m going to do is use counter-trend zig-zags to add new positions. To ride that trend to potentially enormous profits. You should consider doing the same.
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