Dollar strength, the one (near) certainty in times of uncertainty

The US dollar has been on the rise and has room to continue reigning supreme as long as uncertainty prevails. That is one thing Valeria Bednarik, Joseph Trevisani, and Yohay Elam can agree on in a conversation including politics arguments, central bank policy, coronavirus, and more.

Yohay Elam: President Donald Trump has advocated for a stronger dollar. His current stance marks a shift from a previous stance

Yohay Elam: More broadly, what are the implications of a stronger dollar to the US?

Joseph Trevisani: At the moment, it is probably more valuable to the US than to trade considerations

Valeria Bednarik: Indeed, and just like that, Powell dismissed tightening rates sub-zero, further boosting the greenback. Not a surprise from Powell, tough

Yohay Elam: A stronger currency makes a country richer, allowing companies to purchase other ones abroad, keeps prices of imported goods low, thus raising the living standards of citizens

Yohay Elam: But it also hurts exports

Yohay Elam: Regarding negative rates, Powell's comments were not surprising indeed. Sub-zero rates were not a huge success in the eurozone and Japan

Joseph Trevisani: It also is a magnet for investment, even though expensive to begin with investment earn dollars. With the global supply chain about to undergo some serious adjustment  and energy prices low and the US still the  largest market it should help bring manufacturing back to the US

Valeria Bednarik: I do believe it has more to do with what Joseph has just said. The economic comeback is now Trump's main concern

Joseph Trevisani: Negative rates are a political trap and I think the Fed knows it. It was the Fed that worked the hardest to escape the zero bound under Yellen, who does not get enough credit for leading that policy

Joseph Trevisani: Yes, politically the best way for Trump to win re-elections is to have a successful recovery. The Democrats have lined themselves on the side of continuing the closures

Valeria Bednarik: On the other hand, stocks have entered a selling spiral this week, and the DJIA is now sub-23,000...

Joseph Trevisani: True, but the economic news is all bad, and even though everyone knew April would be much worse than March. It's disconcerting

Joseph Trevisani: If sales fall 12% in April as the forecast, that would be 20% in two months. In the second half of 2008, six months the total drop was just 12.4%

Yohay Elam: I understand Trump's bashing of China, which has bipartisan support. He also always looks for someone else to blame. Over 80,000 deaths from something he called the new Democrats' hoax as late as February 28 is a total failure

Yohay Elam: But pushing for quick reopening is a political miscalculation. By risking further waves, he undermines support and that could also prove even more detrimental to the economy

Yohay Elam: Some polls show Republicans may even lose the Senate

Yohay Elam: Too soon to know, but I don't think he has the best advisors

Joseph Trevisani: In a consumer-driven economy that is more than a disaster.  I think dollar strength is still risk aversion strength

Yohay Elam: Consumption like everything else will eventually make a comeback

Yohay Elam: But returning to 2019 output levels will probably take until 2022

Yohay Elam: It's a long recovery...not only in the US but elsewhere

Valeria Bednarik: Yet elections are in the way, and Trump will play all possible cards to get a second term...

Joseph Trevisani: I would be very wary of polls, and the Republicans won two special elections yesterday by large margins... Most political reporting in the Trump era is, I am afraid, just disguised political advocacy

Valeria Bednarik: Blame China, blame Powell, blame Fauci.. all but him are responsible

Joseph Trevisani: And there is still the Durham investigation and assorted scandals, so it is far too early to see how these play out

Yohay Elam: Johnson is leaning on doctors for advice, extending the lockdown and the public supports him despite the economic hit

Joseph Trevisani: As we like to say... we live interesting times

Valeria Bednarik: I have to reckon, anyway, that his detractors are playing as nasty as him

Yohay Elam: Trump prefers blaming the messengers

Joseph Trevisani: As the old saying goes... politics ain't beanbag

Valeria Bednarik: I have the idea that all ends in the people. You have those that are willing to go out, screaming from freedom and those that will likely stay home even if lockdowns are lifted in certain states. So, of those over 22 million Americans now furloughed, how many and when are coming back?

Valeria Bednarik: The economy won't quick in unless those numbers begin decreasing drastically.. could become a leading indicator

Yohay Elam: Sweden and Denmark have similar cultures and both enacted different policies on the virus

Joseph Trevisani: The Obama administration spying scandal has great potential to upset all current political calculations... We shall have to wait and see. Indictments of major figures of the former administration would have a huge impact on the election. American tend to respect the legal system

Yohay Elam: Consumption dropped in both countries by the same scale

Yohay Elam: Trump's criticism of America's legal system will come back to haunt him

Yohay Elam: He blamed everybody

Yohay Elam: New scandals will not stick

Yohay Elam: The public sees everything as partisan

Joseph Trevisani: I saw an NBER report yesterday that 42% of layoffs will not come back. Now, NBER is well respected for its recession dating work, but you have to wonder how many assumptions went int that calculation, and how well supported are they?

Yohay Elam: Uncertainty is extreme

Joseph Trevisani: Exactly... still NBER got a headline

Valeria Bednarik: Unfortunately, we are facing a long wait-and-see on uncertainty

Valeria Bednarik: And the election, polls, etc, will become another factor lifting uncertainty

Yohay Elam: Most flights are canceled in Argentina through December, you´ve mentioned

Valeria Bednarik: Is there any chance elections could be delayed?

Valeria Bednarik: Is it legal? possible?

Joseph Trevisani: Consumption is key. On that topic, tomorrow's Michigan consumer sentiment report will be important

Joseph Trevisani: And no, at this point, I don't think a delayed election is likely... but was there a huge resurgence of the virus in the summer and fall, who knows...

Joseph Trevisani: I assume Congress has jurisdiction over federal elections, but which chamber, or both, I don't know

Joseph Trevisani: Domestic flights are canceled?

Valeria Bednarik: Where?

Joseph Trevisani: In Argentina?

Valeria Bednarik: Ahh yeah, until December according to the latest news. Flight, buses, all...

Valeria Bednarik: There are some provinces that put you on quarantine if you want to get in... others force you to pay for a test... fun fun

Joseph Trevisani: For six months?

Valeria Bednarik: Yups

Valeria Bednarik: And the dollar is up over 90% since the December election

Joseph Trevisani: That would not fly (no pun) here

Valeria Bednarik: It's all a topic, the dollarized third world

Yohay Elam: I can fly to many places if I am willing to be quarantined for 14 days. Not my preferred holiday...

Yohay Elam: A stronger dollar has implications on Argentina and other countries

Yohay Elam: As trading with other countries is in dollars

Valeria Bednarik: For sure. A stronger dollar will affect multiple other countries, and hence international trade

Valeria Bednarik: But that won't scare traders

Yohay Elam: When the king of cash reigns supreme, trade struggles

Joseph Trevisani: A strong dollar price for commodities makes them obviously more expensive for non-dollar currencies but most commodities (except gold) are relatively cheap now, demand being down

Valeria Bednarik: Well, with the world in a stalemate, demand for oil sunk. Gold is in better shape and with reduced mining activity, I see it better poise to extend its gains in the upcoming months

Yohay Elam: With all the extra QE and the high interest we have in gold, its price seems stubbornly low. Perhaps too much hype?

Valeria Bednarik: Give it some time ;)

Joseph Trevisani: April statistics in the US and elsewhere will be terrible if we look to May for the first sign of recovery those statistics will not be out until June... if we look at the weekly claims they still appear grim. I don't think the almost 60% drop from the peak is meaningful if another 3 million are unemployed each week

Valeria Bednarik: As I said, we need to see those numbers improving, before even discussing an "economic rebound"

Valeria Bednarik: Slow, V or L shaped

Yohay Elam: I think V is already forgotten

Valeria Bednarik: Yups, agreed

Yohay Elam: It's more of bathtub shape or a Nike swoosh

Joseph Trevisani: Agreed also... consumption is most important

Yohay Elam: The EU's forecasts are for recoveries in 2021 that will be lower than the falls seen in 2020. But their forecasts are highly uncertain of course

Joseph Trevisani: Forecasts and modeling in a situation like this are mostly assumptions, there are so many unknowns and no historical record

Valeria Bednarik: Exactly. It could be much worse or surprisingly better

Yohay Elam: An "illustrative scenario" said the BOE

Joseph Trevisani: It reminds me of Isaac Asimov's Foundation Trilogy and the science of psychohistory, which in the novels is capable of predicting the possible paths of societal evolution. We don't know how consumers in mass will react once the closures and lockdowns end

Yohay Elam: Doctors are learning how to treat the disease. Every week is better. But that would convince people to go out and about

Yohay Elam: A vaccine should provide that confidence

Yohay Elam: But that may take time

Joseph Trevisani: I would guess a cautious start then a gathering return to normal if the virus does not surge.  Yes either or both a treatment vaccine would change all

Yohay Elam: Business trips will probably not return to what they used to be, but tourism and restaurants will hopefully return

Valeria Bednarik: But won't happen anytime soon. And in the meantime, the greenback what? up?

Yohay Elam: I think so, dollar up

Joseph Trevisani: We are probably in for a period of several weeks of pronounced uncertainty until more information is available.  That is the main reason for the equity decline and dollar strength

Valeria Bednarik: Yups

Joseph Trevisani: Yes, uncertainty plays to the dollar

Valeria Bednarik: A few more weeks

Joseph Trevisani: I am going to talk to the owner of my favorite restaurant, I'll report back what he says

Yohay Elam: Ordering deliveries is not the same

Yohay Elam: No fun in takeouts either

Yohay Elam: What is your favorite restaurant?

Joseph Trevisani: Agreed for both

Yohay Elam: Next time that people visiting Spain can enter a country without a 14-day quarantine...

Joseph Trevisani: Local on the Upper West Side in Manhattan... Regional

Yohay Elam: Looks good

Yohay Elam: I guess we can conclude

Yohay Elam: Dollar strength is likely here to stay

Yohay Elam: Mostly driven by uncertainty