Dollar Pushes to New Highs—With New Risks

Early victim could be tepid recovery in U.S. corporate profits.

By Chelsey Dulaney, Ben Eisen and Ira Iosebashvili

The ICE U.S. Dollar Index, which measures the U.S. currency against six others, reached its highest level in more than 13 years Thursday. Photo: Reuters

The dollar extended its powerful rally Friday, a move that poses new risks to budding optimism about the economy following the U.S. election.

The U.S. currency moved closer to parity with the euro and higher against the yen. In recent days, the dollar has pushed exchange rates lower for emerging markets around the world.

The dollar is rising fast as investors bet that fiscal spending and tax cuts proposed by President-elect Donald Trump will spur U.S. economic growth, and the rising probability that the Federal Reserve will raise interest rates next month. Federal Reserve Chairwoman Janet Yellen said on Thursday that the Fed could act “relatively soon.”

The gains make foreign goods and travel cheaper for U.S. consumers and could give a boost to exports from Japan and Europe. But they also are reigniting fears that the dollar’s strength could slow U.S. corporate profit growth and intensify capital flight from the developing world, which would complicate the prospects for an economic rebound.

The fast move has set off reactions by monetary officials around the world. Indonesia’s central bank has intervened by selling dollars in hopes of slowing the rupiah’s slide. Malaysia, faced with a deep drop in the ringgit, cracked down on trading in the futures market in an effort to damp speculation on the currency. China intervened as well, setting the yuan for several days but using state-owned banks to prevent the currency from falling too far.

Ms. Yellen reminded the Joint Economic Committee of Congress on Thursday that the stronger U.S. currency was already weighing on some U.S. industrial companies.

“Manufacturing output continues to be restrained by the weakness in economic growth abroad and by the appreciation in the U.S. dollar over the past two years,” she said.

Investors are betting on companies that generate most of their revenue in the U.S. and are less exposed to currency fluctuations. Shares in S&P 500 companies with more than 90% of their revenue from inside the U.S., such as Kohl’s Corp., climbed 3.4% since the election through Wednesday.

Shares in companies that generate the majority of their revenue outside the U.S., like International Business Machines Corp., have edged up just 1.9%, according to Bespoke Investment Group.

It could be a self-defeating rally, though. A Goldman Sachs Group Inc. gauge of how restrictive U.S. financial conditions are to growth has risen this week to its highest level since March, indicating tightening financial conditions. The index, which takes into account factors like credit spreads and the level of the dollar, was up to 100.1117 on Wednesday from 99.8766 on Nov. 8, with the dollar’s strength contributing to 84% of its rise since the election.

A stronger dollar tightens financial conditions because it makes it more costly for those outside the U.S. to borrow dollars. It also gives companies less money to spend by restraining profits.

Sharp gains in the U.S. currency can unsettle markets abroad. Prices for raw materials, a main export for many developing countries, can come under pressure because they are denominated in dollars and become more expensive for foreign buyers. Commodities like oil, gold and coal have traded lower in recent days under pressure from the strengthening dollar, analysts say.

Dollar-denominated debt has become more expensive to pay back at a time when these countries are bingeing on it. Emerging-market debt issuance in dollars in 2016 is the largest on record, at $409 billion, eclipsing the previous high of $403 billion set two years ago, according to Dealogic.

There is precedent: The dollar’s 8% rise during the first seven months of 2015 helped precipitate panicked selloffs across global markets that August.

Many investors are already dumping developing-country assets. Nearly $10 billion in foreign investment has flowed out of emerging-market stocks and bonds since the election, Institute of International Finance data show.

China’s yuan fell to eight-year lows this week, stoking fears that the yuan’s weakness might pressure other developing countries to competitively devalue their own currencies.

“The yuan is going down much faster than people had expected,” said Mr. Lewis of Fiera Capital.

“That typically has not been positive for other Asian currencies and other markets.

Donald Trump’s Foreign-Policy Challenges

Joseph S. Nye
. Putin on defender of the motherland day


CAMBRIDGE – During his campaign, US President-elect Donald Trump questioned the alliances and institutions that undergird the liberal world order, but he spelled out few specific policies. Perhaps the most important question raised by his victory is whether the long phase of globalization that began at the end of World War II is essentially over.
Not necessarily. Even if trade agreements like the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership fail and economic globalization slows, technology is promoting ecological, political, and social globalization in the form of climate change, transnational terrorism, and migration – whether Trump likes it or not. World order is more than just economics, and the United States remains central to it.
Americans frequently misunderstand our place in the world. We oscillate between triumphalism and declinism. After the Soviets launched Sputnik in 1957, we believed we were in decline. In the 1980s, we thought the Japanese were ten feet tall. In the aftermath of the Great Recession of 2008, many Americans mistakenly believed that China had become more powerful than the United States.
Despite Trump’s campaign rhetoric, the US is not in decline. Because of immigration, it is the only major developed country that will not suffer a demographic decline by mid-century; its dependence on energy imports is diminishing rather than rising; it is at the forefront of the major technologies (bio, nano, information) that will shape this century; and its universities dominate the world league tables.
Many important issues will crowd Trump’s foreign policy agenda, but a few key issues will likely dominate – namely great power relations with China and Russia and the turmoil in the Middle East.
A strong American military remains necessary but not sufficient to address all three. Maintaining the military balance in Europe and East Asia is an important source of American influence, but Trump is correct that trying to control the internal politics of nationalistic populations in the Middle East is a recipe for failure.
The Middle East is undergoing a complex set of revolutions stemming from artificial post-colonial boundaries; religious sectarian strife, and the delayed modernization described in the United Nations’ Arab Human Development Reports. The resulting turmoil may last for decades, and it will continue to feed radical jihadist terrorism. Europe remained unstable for 25 years after the French Revolution, and military interventions by outside powers made things worse.
But, even with reduced energy imports from the Middle East, the US cannot turn its back on the region, given its interests in Israel, non-proliferation, and human rights, among others. The civil war in Syria is not only a humanitarian disaster; it is also destabilizing the region and Europe as well. The US cannot ignore such events, but its policy should be one of containment, influencing outcomes by nudging and reinforcing our allies, rather than trying to assert direct military control, which would be both costly and counterproductive.
In contrast, the regional balance of power in Asia makes the US welcome there. The rise of China has fueled concern in India, Japan, Vietnam, and other countries. Managing China’s global rise is one of this century’s great foreign-policy challenges, and America’s bipartisan dual-track strategy of “integrate but insure” – under which the US invited China to join the liberal world order, while reaffirming its security treaty with Japan – remains the right approach.
Unlike a century ago, when a rising Germany (which had surpassed Britain by 1900) stoked fears that helped precipitate the disaster of 1914, China is not about to pass us in overall power. Even if China’s economy surpasses America’s in total size by 2030 or 2040, its per capita income (a better measure of an economy’s sophistication) will lag. Moreover, China will not equal US military “hard power” or its “soft power” of attraction. As Lee Kuan Yew once said, so long as the US remains open and attracts the talents of the world, China will “give you a run for your money,” but will not replace the US.
For these reasons, the US does not need a policy of containment of China. The only country that can contain China is China. As it presses its territorial conflicts with neighbors, China contains itself. The US needs to launch economic initiatives in Southeast Asia, reaffirm its alliances with Japan and Korea, and continue to improve relations with India.
Finally, there is Russia, a country in decline, but with a nuclear arsenal sufficient to destroy the US – and thus still a potential threat to America and others. Russia, almost entirely dependent on revenues from its energy resources, is a “one crop economy” with corrupt institutions and insurmountable demographic and health problems. President Vladimir Putin’s interventions in neighboring countries and the Middle East, and his cyber attacks on the US and others, though intended to make Russia look great again, merely worsen the country’s long-term prospects. In the short run, however, declining countries often take more risks and are thus more dangerous – witness the Austro-Hungarian Empire in 1914.
This has created a policy dilemma. On the one hand, it is important to resist Putin’s game-changing challenge to the post-1945 liberal order’s prohibition on the use of force by states to seize territory from their neighbors. At the same time, Trump is correct to avoid the complete isolation of a country with which we have overlapping interests when it comes to nuclear security, non-proliferation, anti-terrorism, the Arctic, and regional issues like Iran and Afghanistan. Financial and energy sanctions are necessary for deterrence; but we also have genuine interests that are best advanced by dealing with Russia. No one would gain from a new Cold War.
The US is not in decline. The immediate foreign-policy task for Trump will be to adjust his rhetoric and reassure allies and others of America’s continuing role in the liberal world order.

A Time for Refusal


It is a Sunday afternoon in a provincial town in France. Two men meet at a cafe. One of them, Berenger, is half-drunk. He is being berated by his companion, Jean. All of the sudden, they hear a great noise. When they and other townspeople crane their necks to figure out what’s going on, they see a large animal thundering down one of the streets, stamping and snorting all the way. A rhinoceros! Not long after, there’s another. They are startled. It’s outrageous.

Something must be done. What they begin to do is argue heatedly about whether the second rhino was the first one going past a second time or a different one, and then about whether the rhinos are African or Asiatic.
Things become more disturbing in the next act. (This is a play: “Rhinoceros,” written by Eugène Ionesco.) The rhino sightings continue to be the subject of pointless dispute. Then, one by one, various people in the town begin to turn into rhinos. Their skin hardens, bumps appear over their noses and grow into horns. Jean had been one of those scandalized by the first two rhino sightings, but he becomes a rhino, too. Midway through his metamorphosis, Berenger argues with him: “You must admit that we have a philosophy that animals don’t share, and an irreplaceable set of values, which it’s taken centuries of human civilization to build up.” Jean, well on his way to being a rhino, retorts, “When we’ve demolished all that, we’ll be better off!”
It is an epidemic of “rhinoceritis.” Almost everyone succumbs: those who admire the brute force of the rhinos, those who didn’t believe the sightings to begin with, those who initially found them alarming. One character, Dudard, declares, “If you’re going to criticize, it’s better to do so from the inside.” And so he willingly undergoes the metamorphosis, and there’s no way back for him. The final holdouts from this mass capitulation are Berenger and Daisy, his co-worker.
Eugène Ionesco was French-Romanian. He wrote “Rhinoceros” in 1958 as a response to totalitarian movements in Europe, but he was influenced specifically by his experience of fascism in Romania in the 1930s. Ionesco wanted to know why so many people give in to these poisonous ideologies. How could so many get it so wrong? The play, an absurd farce, was one way he grappled with this problem.
On Aug. 19, 2015, shortly after midnight, the brothers Stephen and Scott Leader assaulted Guillermo Rodriguez. Rodriguez had been sleeping near a train station in Boston. The Leader brothers beat him with a metal pipe, breaking his nose and bruising his ribs, and called him a “wetback.” They urinated on him. “All these illegals need to be deported,” they are said to have declared during the attack. The brothers were fans of the candidate who would go on to win the Republican party’s presidential nomination. Told of the incident at the time, that candidate said: “People who are following me are very passionate. They love this country, and they want this country to be great again.”
That was the moment when my mental alarm bells, already ringing, went amok. There were many other astonishing events to come — the accounts of sexual violence, the evidence of racism, the promise of torture, the advocacy of war crimes — but the assault on Rodriguez, as well as the largely tolerant response to it, was a marker. Some people were outraged, but outrage soon became its own ineffectual reflex. Others found a rich vein of humor in the parade of obscenities and cruelties. Others simply took a view similar to that of the character Botard in Ionesco’s play: “I don’t mean to be offensive. But I don’t believe a word of it. No rhinoceros has ever been seen in this country!”
In the early hours of Nov. 9, 2016, the winner of the presidential election was declared. As the day unfolded, the extent to which a moral rhinoceritis had taken hold was apparent. People magazine had a giddy piece about the president-elect’s daughter and her family, a sequence of photos that they headlined “way too cute.” In The New York Times, one opinion piece suggested that the belligerent bigot’s supporters ought not be shamed. Another asked whether this president-elect could be a good president and found cause for optimism. Cable news anchors were able to express their surprise at the outcome of the election, but not in any way vocalize their fury. All around were the unmistakable signs of normalization in progress. So many were falling into line without being pushed. It was happening at tremendous speed, like a contagion. And it was catching even those whose plan was, like Dudard’s in “Rhinoceros,” to criticize “from the inside.”
Evil settles into everyday life when people are unable or unwilling to recognize it. It makes its home among us when we are keen to minimize it or describe it as something else. This is not a process that began a week or month or year ago. It did not begin with drone assassinations, or with the war on Iraq. Evil has always been here. But now it has taken on a totalitarian tone.
At the end of “Rhinoceros,” Daisy finds the call of the herd irresistible. Her skin goes green, she develops a horn, she’s gone. Berenger, imperfect, all alone, is racked by doubts. He is determined to keep his humanity, but looking in the mirror, he suddenly finds himself quite strange. He feels like a monster for being so out of step with the consensus. He is afraid of what this independence will cost him. But he keeps his resolve, and refuses to accept the horrible new normalcy. He’ll put up a fight, he says. “I’m not capitulating!” 

'Believe Me, We're In A Bubble Right Now - A Big, Fat, Ugly Bubble'

by: Gary Gordon

- Stocks have been trading at exorbitant prices across a wide range of historically reliable metrics.

- I have argued for nearly two years that a bull market predicated on the expansion of the Federal Reserve’s balance sheet cannot rise in a meaningful manner when the balance sheet itself stops growing.

- You may want to keep a healthy dollup of cash in your pocket to protect against the realistic possibility that risk assets struggle to stay at current levels.
Six trading weeks ago, on September 26, 2016, a famous businessman warned about risk in the investing environment. He declared the following:
“Believe me, we’re in a bubble right now. The only thing that looks good right now is the stock market and if you raise interest rates even a little bit, that’s going to come crashing down. We are in a big, fat, ugly bubble.“
Care to take a stab at the prominent voice responsible for the admonition? It was President-elect Donald Trump.
Perhaps ironically, Trump was a long-shot candidate aiming for an upset bid to win the White House when he made the remark. Now he is the President-elect. Yet the question remains… were the remarks little more than bluster at the initial debate with Secretary Clinton or did they accurately reflect the risk of financial loss moving forward?
We can begin answering the inquiry by taking a look at traditional valuation measures. Doug Short from Advisor Perspectives aggregated the average of four popular valuation methods through the end of October. Not only are U.S. equities more overvalued on the average of these indicators than they were in October of 2007 before the financial crisis – not only are stock valuations close to two standard deviations above the collective mean – but the current circumstances have only been surpassed by the bull market tops in 1929 and 2000.

In truth, the above-described findings are not particularly shocking. You can even replicate the findings with scores of less popular valuation techniques – market-cap-to-GDP, margin debt, price-to-sales, household equity percentage, household net worth as a percentage of GDP and so forth.
Stocks have been trading at exorbitant prices across a wide range of historically reliable metrics.
There is one “justification” for current stock prices. Specifically, bullish optimists maintain that ultra-low interest rates justify higher-than-normal stock prices. The argument is twofold:

(1) Stocks are supposedly attractive when the earnings yield (E/P) is greater than the 10-year treasury yield, and (2) Stocks are attractive when dividend prices exceed the yield on the 10-year treasury.
Unfortunately, as I have written about at length in the past, the “Fed Model” does not hold up particularly well in a historical context. First of all, there’s no such thing as an earnings yield in stocks. For instance, you do not actually lock in an earnings yield of 5.6% should the S&P 500 present a Forward P/E of 17.8. The E/P is entirely theoretical.
Perhaps more importantly, those who have been arguing that the dividend yield is higher than the equity yield of the S&P 500 may need to reassess. The 30-day SEC yield for the S&P 500 SPDR Trust (NYSEARCA:SPY) is 2%. The 10-year yield? 2.14%.
I do not agree with Trump’s notion that we are in a “big, fat ugly bubble” that is doomed to burst in spectacular fashion. I view the current environment as having very little upside reward for a whole lot of risk. I visualize a balloon that is not capable of taking in a whole lot of additional air, but one that may (or may not) see the gas leak slowly out of the rubber. It may even reflate after some leakage such that an epic balloon popping does not come to fruition.
In this vein, I have argued for nearly two years that a bull market predicated on the expansion of the Federal Reserve’s balance sheet cannot rise in a meaningful manner when the balance sheet itself stops growing. Indeed, since the Fed ended the creation of new dollar credits in the 4th quarter of 2014, the total U.S. market in the Russell 3000 has barely gained ground. And the broad-based New York Stock Exchange? The NYSE Composite has actually lost ground over two years.
Let me come back to a portion of the Trump comment again. He said, “The only thing that looks good right now is the stock market and if you raise interest rates even a little bit, that’s going to come crashing down.”
By most accounts, the Fed intends to raise rates a little bit (0.25%) in December. More noticeably, the bond market itself has seen to the 10-year treasury yield rocket 50 basis points (0.50%) since Trump first made the declaration. So why haven’t stocks come crashing down yet? How far do those bond yields have to rise before stocks really do falter?
Keep an eye on the U.S. dollar. If the Fed raises its overnight lending rate in December as most expect them to do, and if the dollar pushes above resistance levels as they did last year, an imperfect storm may develop. Specifically, an elevated dollar (as seen in the chart below) would hamper corporate earnings at a time when borrowing costs are moving higher. That may not be a pretty picture for equity enthusiasts.
It has been fascinating to watch the mainstream media change its tune about the ways in which Trump would adversely affect the stock market. The truth? There are certain industries that may benefit from the President-elect’s proposals (e.g. defense contractors, resources, financials, etc.).
There are other industries that may fare poorly (e.g., technology, alternative energy, hospitals, etc.).
Nevertheless, U.S. stocks are still exceptionally pricey and higher bond yields may be difficult to overcome. Live by the rate manipulation sword, die by the rate manipulation sword.

It is also is worth remembering that year-over-year job growth peaked (2.3%) near the time that the Fed finished its QE program. It is down to 1.7% today. A similar peak occurred in job openings near the tail end of 2014.
The bottom line? Those who did not see their livelihoods improve during our slow-go economic recovery may hope that President-elect Trump can deliver the goods. And investors may hope that a Trump presidency will enhance their portfolio prospects for years to come.
On the flip side, hope has a whole lot of headwinds in its path. Exorbitant valuations. Fed policy uncertainty. Interest rate pressure. You may want to keep a healthy dollup of cash in your pocket to protect against the realistic possibility that risk assets struggle to stay at current levels.

Weekend Edition: Get Ready for the Greatest Financial Mania the World Has Ever Seen

Editor's note: Today and tomorrow, we're sharing an important idea from our longtime friend and founder of Stansberry Research, Porter Stansberry.

You see, right now, we're seeing unprecedented warning signs in credit markets all around the world...

The global scale of these problems means the coming crisis—what Porter has called "the greatest legal transfer of wealth in history"—will be truly historic. And folks who don't see what's coming could be wiped out.

In short, he says this is a critical moment for self-directed investors. And we want to make certain you’re prepared…

Below is Part 1 of Porter's essay on this topic that was originally published on September 9, 2016, in The Stansberry Digest.


It’s something you don’t see very often. It can lead to the most incredible gains of your investing life.

Or it can destroy all of your wealth if you’re swept up in it.

I’ve only seen two bona fide investment manias. I’m not talking about bubbles… or just overvalued securities. I’m talking about real "one way" trades – situations that can only lead to disaster. Yet for some reason, everyone comes to see the trade as a sure way to make money, not lose it.

Let me introduce the idea with a true story. It’s about John Templeton.

You might have heard of him before. He was very active in the markets for more than 50 years – between the Great Depression and the early 1990s. He built a huge mutual-fund company, Templeton Investments, which he sold in 1992 and made $440 million.

His first "big trade" came right after Hitler invaded Poland in 1939. Stocks sold off, hard.

There were 104 different stocks on the New York Stock Exchange that were trading for $1 or less. He put $100 into each of them.

His rationale was that during the Depression there was a surplus of everything, and therefore no profits. During a war, which was surely coming, there would be a shortage of everything and big profits. Within three years he’d made a profit on all but four of the stocks. Over a decade, the profits on this trade were more than 10,000%.

But that’s not the Templeton "big trade" that I want to discuss…

The first real financial mania I saw was in late 1999 and early 2000. Technology stocks had been on a tear higher since the mid-2000s, with companies like Intel, Microsoft, Yahoo, and Qualcomm earning huge returns for investors. Later, though, the number and quality of the companies reaching the public markets began to decline substantially. And by January of 2000, the situation reached a peak.

Garbage was being sold in IPOs to investors desperate to buy them. And so, en masse, investors began to believe a lie that couldn’t possibly be true.

It was the greatest financial mania the world had seen since John Law’s South Sea Bubble in the early 1700s.

I’m happy to report that we did a good job warning people about what was really happening.

As Steve Sjuggerud wrote in January 2000 (on the newsletter’s front page):

We are at the peak of most likely the greatest financial mania that will ever be seen in our lifetimes… and quite possibly the greatest ever witnessed.

With this warning, trailing stop losses, and basic securities analysis, we were able to avoid virtually all of the big losses during 2000 and 2001.

If you were in the markets back then, you surely remember a few of the most famous disasters –, Webvan, and WorldCom. These firms were backed by respected venture capitalists and had business plans that were at least plausible. But this wasn’t just a bubble. It was a mania. Even the most obviously worthless ventures reached multibillion-dollar valuations.

Inktomi, for example, reached a $25 billion valuation in March 2000. It made generic software for internet service providers but never made a profit. In 2002, Yahoo purchased the company for $235 million. It overpaid. In 2009, the Inktomi software was donated to the public under an open-source license. Everyone can use it today for free. spent $188 million of investors’ money and was worth more than $1 billion (on paper).

It owned a single high-fashion online store and generated less than $10 million in revenue before going bankrupt in less than 12 months.

Pixelon was a digital-streaming company that launched operations with a $16 million party, featuring The Who and the Dixie Chicks. It failed in less than a year. It never produced any revenue.

And Lycos was a fourth-rate search engine. Spanish telecom operator Telefonica bought it for $12.5 billion. In 2004, it sold it for $95 million. It’s still around, believe it or not. Its owners promise that a "new Lycos" is coming soon. It’s traded in India, if you’re interested.

There were hundreds of IPOs like these. An index of dot-com companies tracked by fell 75% in 2000. Many stocks fell by 99% – including U.S. Interactive, Pacific Gateway Exchange, Cornerstone Internet Solutions, and Worldwide Exceed Group.

We read the prospectuses of many of these IPOs and laughed about how anyone would buy them at any price. Most of the disclosures said clearly that these companies had few, if any, clients. Most of them said they had no written agreements or contracts.

The risk disclosures explained, in plain English, that these weren’t real businesses and they had close to zero chance of staying in business. And it didn’t matter. No matter what was disclosed, investors would buy the stock. It was a true mania.

Templeton watched the market action quietly from his retirement home in the Bahamas.

Finally, on January 1, he knew that the mania couldn’t go on much longer. The frauds were outnumbering the legitimate IPOs by 10 to 1. He called his broker in New York and gave very simple instructions:

Short as many shares as you can get of every technology IPO that lists. Establish the position 11 trading days before the lock-up expires. (The lock-up prevents insiders from selling shares until some period after the IPO, typically 90 days.)

In the first half of 2000, Templeton ended up shorting 84 stocks, putting an average of $2.2 million into each of them. He made more than $100 million on the trade in about a year. More than half of the stocks fell 95% or more. Of the trade, Templeton told Forbes magazine:

This is the only time in my 88 years when I saw technology stocks go to 100 times earnings; or, when there were no earnings, 20 times sales. It was insane, and I took advantage of the temporary insanity.

I never thought I’d see a mania like that happen again in my life.

Remember… this wasn’t merely a case of overvalued stocks. This was a situation where investors were completely ignoring the obvious fact that the overwhelming majority of these companies would fail and then bidding them up to completely insane prices.

This wasn’t overexuberance. It was madness. And over the next 24 months, investors saw $5 trillion of market value disappear.

But today, there’s a much, much larger and more dangerous mania. It’s a mania that has been created (and is being sustained) by central banks and printing presses.

Good investing,

Porter Stansberry