Why the Bullish Dollar Theory Is Flawed

May 10, 2020

Mish's Daily

By Mish Schneider

blankMaybe I just love a contrarian view.

My dollar theory differs from so many analysts.

First, I know that the traditional relationship between the dollar, commodities and the stock market holds for a while, then completely shift according to each economic cycle.

I have experienced it during my trading career and delved into it when I was writing my book.

Secondly, I know that all relationships in current times are historic and suspect. Just think about NASDAQ now up on the year, given all the bad news with most likely, more bad news on the horizon.

Thirdly, I have held steadfast to my stagflation theory. Now, I see Paul Tudor Jones and other media folks beginning to hypothesize the same. After all, it does not take that much gray matter to figure out that the tidal wave in money supply and fiscal stimulus is a head’s up.

Why are so many folks bullish the dollar?

Here is the theory in a nutshell.

Dollar bulls believe that the need for dollars by foreign governments is a lay-up for the dollar.

They also believe that the threat of tariffs with China could bolster the dollar, while China devalues the Yuan. And in the short-term, they are correct.

I believe that the short-term logic though, is not sustainable.

Here are 10 reasons why.

One: rising food prices with low supply, rising gold demand returning, the rise of bitcoin all equal stagflation.
Two: rising unrest to the point of calls for a civil war and perhaps revolution, in the US and globally, including China.
Three: a second wave of Covid-19 looking inevitable
Four: no real solid implied relationship between the dollar and the market, plus the recent rise of bitcoin.
Five: in 1970s the dollar initially rose, then inflation drove the dollar down, while recession lingered.
Six: historical low interest rates-like never before with talks of the US going negative while debt soars to historical high levels.
Seven: a great reckoning soon to come in regards to the ginormous debt balloon
Eight-underestimating an alliance of China Russia and perhaps India which could threaten the dollar as the world’s reserve currency.
Nine: oil and Iran, which could explode at any time to drive oil up. Will make all deflation theories unravel like a bad run in a stocking.
Ten: on the charts, huge resistance at 101.

How does this impact the market?

The longer-term effect of the virus could be lower demand. But with the amount of money being dumped into the global economy, the ultimate scenario is for stag to hyperinflation. That is not good for the dollar.

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S&P 500 (SPY) 294.88 last swing high. 287.50 support

Russell 2000 (IWM) 128.50 support 136.85 last swing high

Dow (DIA) 240 support 247.67 last swing high

Nasdaq (QQQ) New swing high 229.32 a gap to fill 220 support

KRE (Regional Banks) Needs to hold 35.65 and clear 37.50 next

SMH (Semiconductors) 132.75 support 139.36 last swing high

IYT (Transportation) Has to hold 143.50. 155.60 last swing high

IBB (Biotechnology) 128 cleared so now we watch to see if it holds

XRT (Retail) 38.43 last swing high. 36.60 support

Volatility Index (VXX) 34.30 support on a weekly chart

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