Submitted by Yves Lamoureux of Macquarie Private Wealth
If you have been wondering what is the real reason for the recent upswing in the US dollar, read on. I am very bullish on its future rise. This report follows our early December comments, which were appropriately called “The carry trade now in trouble.” You can review them at http://www.zerohedge.com/article/guest-post-carry-trade-now-trouble.
Very clearly, we stated, “The carry trade as a barometer of things to come will show the unwind at the early stage. From my perspective it is here and now that the carry trade ends.”
My recent enthusiasm is largely based on evidence gathered since 2007 of the loss of velocity in money aggregates. In other words, the money base is contracting or slowing down its expansion phase.
Like anything that matters in the investing world: rarity defines value. It would then be no surprise that the US dollar will appreciate in the medium term. This is what I call the “now mechanics.” Recent movements are still mostly defined as stocks versus bonds and anything else here has been a sideshow. I am still bullish on a number of things—namely, the hard assets category. I do think that timing is critical to temper this bullishness and money contraction will become the overriding factor.
Even when broad-based equity markets rally, I find astonishing that money is not able to gain traction. The focus on M1 is ultimately wrong, since it is not transmitted to other parts of the economy.
However, it should not be underappreciated that falling stocks will have huge repercussions on the money base and will only exacerbate ongoing volatility. The period 1930 to 1940 was a great example of how the dynamics of money velocity impact stocks and the economy.
We are great students of past eras as they provide guidance and insight into present markets.
People focus too much on the day-to-day news as it reveals very little of the markets’ often superb anticipation skills. Contracting money, to us, is now the prime driver of the greenback’s rise and its ascension could definitely surprise us .
Yves Lamoureux, Investment Advisor, Macquarie Private Wealth Inc.
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