The dollar is
currently rising through levels not seen since the mid to late 1990s. That of
course was a time of great optimism, inspired by a wave of economic development
and expansion, not just in the US but across the globe as a whole. Since then
we’ve seen the dollar peak and drop to lows made just prior to the onset of the
Global Financial Crisis of 2008. Along the way, the tech bubble burst, the
housing bubble burst, and finally the commodity bubble burst. The bubbles
themselves representing the peak of the dollar, the accelerated decline, and
reversal respectively over time. Now, the dollar is once again appreciating
steadily versus the currencies of US trading partners.
On the surface, this looks like the US economy is standing
out as a place where an investor can earn a reasonable return when adjusted for
risk, as was possible in the late 1990s. With a few details missing this time
of course. For starters, the economy is just not growing with the same
enthusiasm as it did back then. Unemployment is not providing upward support
for wages and consumption now as it did in the 1990s, while short and medium term
inflation in not expanding providing support for interest rates and monetary. This
much being obvious, the financial markets have been able to steady the course
to higher prices for both stocks and bonds. Albeit, a sizable chunk of the
financial asset price increases can be attributed to the mechanical
requirements of administering the Federal Reserve’s Quantitative Easing
programs by the Federal Open Market Committee (FOMC), the remainder can be
attributed to investors underpricing risks of future price decreases by
continuing to transact at the elevated price levels.
As with most aspects of human existence, this too is
unsustainable. The complexity of the moving parts that influence the macroeconomic,
and monetary equilibrium of an economy like that of the United States will
undoubtedly continue to make deciphering a clear narrative a daunting task.
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