On 29 September, The Financial Times published an op-ed by US economist and author Rana Foroohar, eloquently titled "Are investors ready for the 'Doomsday Dollar' scenario?"
Citing a study concerning the dollar's 15-year cycles by AG Bisset Associates, Foroohar considers a scenario in which US stocks and the dollar are going down at the same time.
"America’s place in the world has changed, and so has the growth potential of its corporations", Foroohar writes. "If that is the case, then we may be in for a correction not just in the stock prices of US multinationals, but in the dollar itself".
According to the firm's calculations the dollar is poised to fall against the euro as much as 50 to 60 percent by 2024. "Rising from $1.05 at the start of 2017, the euro may peak near $2.00 in 2024", AG Bisset Associates, a currency specialist with over 35 years of experience, predicted.
The potential "doomsday" scenario may deal a heavy blow to global investors, Foroohar says, adding that "some savvy investors already see the writing on the wall and have moved into gold" and expecting the rise other commodities in the foreseeable future.
With US companies losing their competitive advantages, investors may consider turning to Asia and working out a new strategy "for a new world", she believes.
According to Eric Kraus, an independent political risk analyst and financial expert, "economic predictions are generally based upon previous experience with analogous situations", however, it's hard to assess what's going to happen as we are heading to "a totally unprecedented" one. The analyst has taken a walk down memory lane to explain how we get there.
Dire Consequences of Quantitative Easing & Negative Interest Rates
"The failure of the Western political system has rendered it impossible for the governing class to accept any degree of economic pain", Kraus says. "To accept a recession as just an inevitable phase of the business cycle would be to commit political suicide. Therefore, the main Central Banks – both the US FED and the European ECB have engaged in a totally unprecedented campaign of money printing – “quantitative easing” and negative interest rates to forestall what should have been the consequences of the 2007 bursting of the financial bubble – a recession cleaning out unsustainable debts and non-viable financial structures by waves of default".
The road to hell is always paved with good intentions. The aforementioned measures taken by the Central banks has become "the death-knell for macro strategists": "Those who followed several hundred years of historical precedent, predicting that, as always before, money printing would cause massive consumer price inflation (CPI) and a surge in gold prices turned out badly wrong," Kraus says.
"Instead, CP inflation has been dead in the water, while asset prices for everything from houses to collectables, as well as stocks and bonds - have gone wild, driven by absurdly low – now negative – interest rates sending investors on a desperate hunt for yield", the analyst elaborates. "Anything but government bonds where you now pay for the privilege of lending to European governments, and where even US rates are historically low".
According to Kraus, while the negative social consequences of this policy including an explosion of income inequalities has manifested itself almost everywhere, the much-discussed destabilisation of a dollar-centric global currency system – though "increasingly unsustainable" – is "not yet subject to any serious challenge despite the transformation of the global economy from the immediate post-WWII situation where the US accounted for almost 50 percent of global GDP, to the current PPP-adjusted 15 percent".
If Dollar Falls Who Will Share Its Burden as Global Reserve Currency?
However, while the dollar has seemed strong in recent years, clouds have been gathering on the American economy for quite a while and "will be brutally revealed whenever the government is no longer able to continue raising ever-increasing debt finance," the financial expert remarks.
The question then arises as to what national currency will be sustainable enough to share the greenback's burden as a global reserve currency. And here is the rub, according to the analyst, as "[the dollar's] major competitor currencies – the euro and the GBP, have problems at least as great."
"The fundamentally stronger currencies – the Swiss franc and the yen – are far too small to absorb all of the inflows, and have been pushed up to painful levels", Kraus continues. "While US rates are low – the yield-spread between dollar and the euro is still about 2 percent, making it painful to hedge dollar exposure into euros. There can be no question that at some point the Chinese RMB will begin to push the dollar from its perch – but the Chinese are in no hurry to open up their capital account and allow the RMB to potentially soar – so we are not there yet."
Gold is Making a Comeback
And that leaves gold – "Keynes’ 'Barbarous Relic' has long been out of fashion," the analyst underscores.
The bullion has been traditionally traded as the reciprocal of the greenback: "A strong dollar means weak gold, of interest rates (high interest – cheap gold, since gold pays no interest), inflation (gold is the ultimate inflation hedge) and risk-tolerance (buying gold is the “fear trade”)," Kraus explains.
Closing chart: $USD : $gold— Permabear Doomster (@permabear_uk) 5 октября 2019 г.
Gold is holding up very well to the broadly strong USD. There remains threat Trump will instruct the US treasury - before year end, to pressure the dollar downward. Along with inevitable threats (and eventual) Fed QE, Gold looks.... poised. pic.twitter.com/kj14asCDqF
However, in recent years this correlation has been completely broken down, according to the financial expert: despite negative rates and a fluctuating dollar gold prices had stagnated around $1,200 following a ten-year recovery from the catastrophic lows of 2000 ($400/0z) but only until the last 18 months.
Conventional wisdom would tell you that the #USD and Gold have a reciprocal relationship. When the USD decreases in value, Gold increases and vice versa. However, recently, the USD and Gold have both been strengthening in tandem. @HenrikZeberg pic.twitter.com/6YIHAw2nm3— Andreas Cseh (@cseh_andreas) 10 октября 2019 г.
In the past year and a half the central banks of Russia and China began to seriously reduce their “Washington risk” by selling down US treasury bonds and buying gold sending the bullion prices to around $1,500/0z.
Gold, Rouble & RMB May Come Out on Top With Ifs and Buts
"Where next?" Kraus asks rhetorically.
"It has recently become fashionable to point to long-term currency charts to show why the dollar must plunge. Perhaps, but given the historically unprecedented monetary policy, caution must be advised. To sell the dollar one must sell it against something. The euro system is unsustainable – it could last for another 20 years – or collapse next week. The yen is already at painful levels. Gold, the Russian rouble, and the Chinese RMB could all benefit from a falling dollar – although the rouble is still somewhat correlated with oil prices (which would plunge in a recession), the Chinese do not wish to see a strengthening RMB – at least not yet, and gold is, well, unpredictable. Good luck – we’ll all need it!"