2017's Dollar Collapse Is The Worst Start Since 1985

Authored by Steven Vannelli via Knowledge Leaders Capital blog,

The USD is off to its worst start since 1985, down about 9%. In the chart below (courtesy of Bianco Research), it appears the USD is tracing its performance in 1985 quite closely. Of course, 1985 was the worst year for the USD in almost 40 years, so if we stay on the current path, expect the USD to drop another 10% from here.

The weak USD is setting up a possibly profitable rotation out of US equities into longer dated US Treasuries. In the next chart, I take the total return of our KLSU DM Americas Index (top 85% of North American market cap) relative to the JP Morgan Government Bond 15+ Years Index. I overlay the USD, and as can be seen from the chart, the relative performance of stocks vs. bonds tracks the USD fairly closely. If the stock/bond ratio follows the USD back to its May 2016 lows, bonds could outperform stocks by about 35%.

The likely mechanism is a plunge in real rates, or TIPS. In this next chart, I overlay 10-year TIPS on the USD (inverted). The last time the USD was around this level, 10-year TIPS yields were zero.

Same idea with 30-year TIPS. Here I use 30-year TIPS and overlay on the USD. The last time the USD was at these levels, 30-year TIPS yielded about 70bps.

Even if breakeven inflation remained unchanged, there appears to be 30-50bps of downside to real rates based on the weaker USD. For a 30-year bond, with a 20-year duration, 30bps of downside would equate to about a 6% return. If the USD falls back into the 80s, shorter dated TIPS yields could easily fall back into negative territory. This could be what gold is sniffing out. Either gold should be at $1,150 or 10-year TIPS should already be around 20bps. If gold breaks above the June 7, 2017 high at $1,291, TIPS should follow.

Since 2003, gold has exhibited a -87% correlation to 10-year TIPS yields. Interesting the high print on gold was in September 2011, when 10-year TIPS yielded 5bps.

Comments

post turtle saver (not verified) SubjectivObject Wed, 08/02/2017 - 11:05 Permalink

so let me get this straight...- dollar indices are dropping- a USD buys the same amount of oil that it did back in 2005- with inflation adjustment, $USD/bbl is actually *cheaper* now than it was in 2005c'mon now... you're in a classic King Dollar scenario here, short term action doesn't mean shit given the above... tell it to the day traders...

In reply to by SubjectivObject

SDShack ReturnOfDaMac Wed, 08/02/2017 - 13:10 Permalink

Yep, real change will not happen until the masses are literally starving in the streets. That's why the Deep State continues doling out just enough bread to keep the sheeple from getting restless. Then add circuses to keep them distracted. And if all this fails, increase the Security State to trample any uprising before it can spread to revolution. The template goes back and has been repeated over and over for thousands of years. The USA Republic became a Feudal Empire over a century ago, and like all empires before it, rose to dominance, and will eventially fall, only to be replaced by yet an even bigger empire I call the New Feudal World Order.  

In reply to by ReturnOfDaMac

Haus-Targaryen LawsofPhysics Wed, 08/02/2017 - 09:34 Permalink

Correct.  This continues as is (light volume, no big ups and no big downs) until:i) A political crisis blows a hole in their system, which they believe is either immaterial, or contained, when in fact it is much more material than originally anticipated and it spreads faster than they can control;ii) A financial crisis erupts and blows a hole in their system, which they believe is either immaterial or contained, when it it is much more material than originally anticipated and spreads throughout the system faster than they can control; or iii) They intentionally blow the thing up for their own purposes. Either way, the system's ultimate failure is contingent upon their hubris, which luckily for us is in almost infinite supply. 

In reply to by LawsofPhysics

HRClinton LawsofPhysics Wed, 08/02/2017 - 13:11 Permalink

Seriously disrupt the Supply Chain?  Right now (((they))) are looking to seriously disrupt the Natgas supply to Europe with LNG from the US, and a pipeline from the Leviathan fields in the Eastern Mediterranean, courtesy of ISISrael. In the mealtime, Qatar is being punished for working with Iran on their common Natgas field.(((They))) will not allow Silk Road South or North to connect to Europe. Hence the assault on Afghanistan, Iran, Russia, and the attempted coup on Erdogan.(((Imperialists))) never back down. They simply regroup and double down until they succeed, or are put down.  People need to learn that much from history.

In reply to by LawsofPhysics

Son of Captain Nemo GlassHouse101 Wed, 08/02/2017 - 09:26 Permalink

It's been breaking all around you since the bailouts... Oh and 7 Middle East countries in 5 (https://www.youtube.com/watch?v=9RC1Mepk_Sw)... no 16 (and counting till it can't) years... but the computer screens and the algos that run behind them are quite durable and made to withstand the impact of falling roofs, trees and I've even heard a thermonuclear hit!

In reply to by GlassHouse101

HRClinton coast1 Wed, 08/02/2017 - 13:21 Permalink

Isn't it obvious? (((They))) are driving down the $, to make our overpriced LNG more attractive to EU currencies.The descendants of (((Bolsheviks))) have Russia and its resources in their covetous cross-hairs. Always have. If Russia buckles, by denying Putin a victory in 2018, then China will be easy pickings.

In reply to by coast1