Mike (Mish) Shedlock | Jan 22, 2018 01:14AM ET
People have been predicting a crash in the US dollar for something like forever. Let's investigate another crash thesis.
ZeroHedge reports the "World's Most Bearish Hedge Fund" has a "Stunning" Theory What Happens Next to the Dollar.
Bear in mind the views that follow are not that of ZeroHedge but rather that of Horseman Global CIO Russell Clark who went 100% short in 2016 with negative results.
Clark did make money in 2017, an impressive result given the performance of the major indexes.
Clark's Theory
In a nutshell, profound dollar weakness will cause the Fed to hike causing capital flight and huge rate hikes.
Let's explore the concept with pictures.
US Dollar Index vs. Fed Funds Rate
Long-Term Synopsis
Some might object that is too long a timeline to make a determination. We need something more "profound".
OK point taken.
Short-Term Synopsis
Cart Before the Horse
Perhaps that is still not "profound" enough.
Regardless, expecting the Fed to react to a falling dollar seems to put the cart before the horse. Let's shift the timelines to make that idea a bit more clear.
US Dollar Index Shifted 3 Years vs. Fed Funds Rate
Explanation
To create the above chart I downloaded the Fred data from the first chart into Excel, then shifted the US dollar index back three years.
That is not a perfect correlation, but it's far better than the first chart. There will never be a perfect correlation but the following general guidelines apply.
General Guidelines
Sexy Predictions
Predicting a crash in nearly anything is sexy. People flock to such predictions, and bad predictions come and go, only to be embraced time and time again.
The US dollar index may crash. Yep, it might. But vs. what?
Please don't tell me the dollar will crash vs Bitcoin. Bitcoin is too small to matter.
Besides, that "crash" if you wish to label it as such, has already occurred. Bitcoin is now highly likely to crash vs the dollar.
Crash vs. What Major Currency?
Wile E. Coyote Moment
OK the US dollar "may" crash. But if you are predicting that, please tell us against what.
Lay out the case. Tell me where I am wrong regarding points 1-6 above.
Those predicting a US dollar crash float like the Wile E. Coyote in mid-air without a leg to stand on.
Gold in Play
The US dollar is not going to "crash" against the euro, the pound, the yen, or the yuan. Problems are similar if not far worse elsewhere.
Hyperinflation calls are absurd.
The US dollar could crash against gold and some believe will.
While I am not calling for a crash vs. gold, I would not be surprised in the least if gold went to $5,000 or higher.
One Recession From Crashing Rates
The irony in the dollar crash thesis is we are likely one recession away from crashing interest rates.
Meanwhile, please consider Mish Mailbag: Inflation-Deflation Debate - Bond Bears Still Wrong .
Also consider "You Bet Your Heinie" Bill Gross Needs a Fatter Crayon .
Just as happened in 2008 when oil soared over $140, people are coming out of the woodwork to proclaim massive inflation and dollar crashes.
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