Investment Strategies from the Falling US Dollar's Perspective

Current Economy and Stock Market Updates

Here is the summary from the broadcast of Financial Sense on 01/20/2018:

• Rising inflationary concerns^[6,7,11,20]
• High prices of commodities (incl. oil)^[25]
• The potential impact appears greatest for commodity futures given a one-percentage-point increase in inflation.^[7]
• Be warned that commodities are often more volatile than both stocks and gold.^[7]
• Interest rates moving higher^[24]
• Longer-term bond yields tend to move in line with inflation expectations, whilst shorter-term yields will be more responsive to central bank rate decisions.
• Inflation plays a very real role in how we should manage our portfolios, but it does not trump factors such as economic growth, monetary policy, or which portion of the business cycle we’re in.^[7]
• Economy is doing well
• Global wise, not just US
• Near full employment
• Increasing wages over a broad range
• Strong personal financials and buying interest
• Falling US dollars^[22-24]
• The US dollar tends to weaken when ex-US growth is accelerating given the dollar's function as the world's reserve currency.
• During global downturns, the opposite happens as the dollar tends to strengthen.^[26]
• The greenback typically gains when the US is either in a severe slump or a robust expansion — and falters in times of moderate growth.^[28]
• Housing to be watched^[14,17]
• Need to determine how the new tax bills will affect the housing this year
• In short term, the market seems to be negatively impacted by the severe weather
• "However, there's no doubt the nation's most expensive markets with high property taxes are going to be adversely impacted by the tax law," said Lawrence Yun, NAR chief economist^[21]

The Breakdown in "King Dollar"

The weekly chart of US Dollar Index doesn't look good and has broken its support level.^[8,9] The breakdown in "King Dollar" may foreshadow multiyear downtrend as depicted below.^[19]

What It Means for Your Investments?

Financial Sense Staff

2018 investment themes from the Financial Sense Staff (note that mainly from falling US dollars perspective):

• Global market (vs. US market)
• Looks attractive from both value and currency perspectives
• Commodity
• Benefits from lower US dollars and rising inflationary concerns
• Normally will be the last sector to peak before economy heading into next recession^[10]
• Deep cyclical
• Energy and materials

What to avoid:

• Bonds
• Rising interest rates mean lower bond values
• Global rates are rising, not just US
• When to invest in bonds again?
• When the economy has become overheated and Fed Reserve has raised interest rate too aggressive and economy starts weakening and interest rate falling, that's the time you returns to the bond investment

HFI Research


The breakdown in "King Dollar" also foreshadows:^[4]

• Value will outperform growth
• In HFI's view, value investors will start to reap the rewards as inflationary forces have coincided with value stocks outperforming growth names.
• Another multiyear uptrend in value and inflationary-proof names.
• Stock picker's market (vs. passive investment in ETFs)

HFI believes the following sectors will perform well over the coming years:

• Cyclicals (XME)
• MLPs (AMLP, AMZA)
• Commodity producers (XOP, GDX, XLE)
• Industrials (EXI)
• Financials (XLF)

Investopedia


You can also take advantage of currency moves by investing in:

• Stronger foreign currencies
• You can invest directly in the currency, currency baskets or in exchange-traded funds (ETFs).
• Stock market indexes or sovereign wealth funds of countries with appreciating currencies
• In the foreign companies or US multinational companies that derive the majority of their revenues from outside the U.S.^[18]
• If you are a non-U.S. investor, you can buy assets in the U.S., especially tangible assets, such as real estate.
• In commodities or companies that support or participate in commodity exploration, production or transportation
• For example, HFI longs OIH^[4]

References

1. DEEP CYCLICAL INVESTING: GETTING IT RIGHT
2. How to Think About Hedging Against Inflation
3. Profiting From A Weak U.S. Dollar
4. The Fall In USD Is Just The Start Of A Multiyear Downtrend And The Start Of A Multiyear Uptrend In Commodities
5. Commodity Prices And Currency Movements
6. TIPS Demand at 13-Year High Shows Inflation Expectations Ramping Up
7. How to Think About Hedging Against Inflation
8. Dollar Reaches Multi-Year Lows as Central Banks Shift Reserves Into Yuan
9. How to Profit From the 2018 Dollar Crash
10. Sector Rotation Analysis
11. Ready. Set. Get Prepared for Inflation!
12. Global Economic Perspective: January (Franklin Templeton Investments)
• Synchronized Global Expansion Continues, with Signs of Increased Demand for Commodities
13. Quarterly market update: Q1 2018 (Fidelity)
14. Rising Mortgage Rates and Housing Bubble 2.0
15. Dramatic Tax Changes Coming Your Way - Here's What You Need to Know
16. Interest rates are on the rise globally (Capital Group)
17. Ross Kay TheWeathyHomeOwner.ca on Canadian Housing
18. Dollar's Drop Has Big Impact On Stocks
• Given the dollar’s steep drop, you would expect to see the “international” basket do much better than the “domestic” basket, and that is exactly how things have played out.
• If the dollar puts in a bottom, though, you should see pretty dramatic rotation back into the “domestic” stocks.
19. U.S. Dollar Index - A Contradictory View - Major Inflection Point
• The alternating 15.6-year cycle is composed of a near-centrally translated 7.8-year interval from peak-to-trough-to-peak etc.
20. What Is The Bond Market Trying To Say?
• Market participants seem to be saying that there is no place for the Trump administration tax cuts and proposed infrastructure spending to go except into inflation and higher deficits.
21. Pending Home Sales Tick Up 0.5 Percent in December
22. U.S. Dollar Bear Market: 3 Reasons It Can Continue
23. As USD liquidity remains abundant, dollar bear market to continue
24. The U.S. Deficits And The U.S. Dollar: Bringing In A New Era?
• As explained by Hans Redeker, a strategist at Morgan Stanley, in the current situation: "The booming global economy and rising capital demand mean the US will face stiffer international competition for capital to finance the deficit, which means it will have to offer higher rates or a cheaper exchange rate, both of which we have seen this year."
25. Commodities: It's The Year Of The Bull
26. Eric Basmajian Positions For 2022: Tightening Into A Slowdown
• When economic growth declines, the US dollar rises.  As the largest economy, the US economic cycle dominates the global economic cycle.  When US economic growth is decelerating, generally, global economic growth is decelerating.  When global growth is decelerating, there's less demand for commodities and manufacturing. Australia and Canada, two major economies, are highly sensitive to the global commodity cycle, which follows global growth
27. Dollars, Eurodollars, and Leverage
28. Dollar’s Busted Bull Run Has Bears Calling End of an Era (Bloomberg)