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Dollar Perils Likely to Continue as Political Drama Hangs Over Washington

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Donald Trump’s tenure as U.S. president has been a boon to U.S. stocks. But it has also been a disaster for the U.S. dollar – a consequence some analysts are attributing to political discord in Washington.

What’s Ailing the Dollar?

To be sure, the dollar’s sickly performance can be attributed to many factors. The Federal Reserve is tightening monetary policy, but is doing so against a meager economic backdrop that many say cannot support many more interest rate increases.

The greenback rose as traders bought the rumour of pending rate hikes, but has fallen as market participants sold the fact.

There’s also reason to believe that political discord in Washington is contributing to the dollar’s slide, now the longest in six years. The dollar has long been a symbol of America’s global economic might. That perception has come under scrutiny as the Trump administration struggles to implement its ambitious economic reforms.

Currency is a relative price, which means it tells you how a country is perceived relative to others. The course of American politics over the past seven months is aptly reflected in its currency. A divided Republican party that leads to further discord on key legislative reforms may impact the greenback in more severe ways.

At the time of writing, the dollar index (DXY) is down 8.6% year-to-date. That puts it among the world’s worst-performing currencies.

Cryptocurrency: The Case for Non-Correlation

Bitcoin and its altcoin competitors have faced heavy volatility as of late, but there’s no denying their outstanding year-to-date performance. Bitcoin has more than doubled since these start of 2017, while ethereum has gained a staggering 2,200%. Although many have (perhaps rightly) attributed these gains to speculation, there’s something much more fundamental at play.

One of the biggest draws of cryptocurrency-as-an-asset is its lack of correlation with other asset classes. Unlike the dollar or even gold, bitcoin’s performance has nothing to do with how other assets perform.

This was recently brought to our attention by researchers at ARK Invest, who found that bitcoin had a superior Sharpe Ratio when compared to other assets. The Sharpe Ratio measures average return based on the level of risk assumed. This information could come in handy for investors looking to diversify away from fiat currencies and the tightening grip of central banking.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 464 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Economy

Why The Dollar Will Get Stronger

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What a contrast.  Just taking a look back to the financial crisis now 10 years old.  Everything seemed bleak.  The stock market crashed to a Dow low of 6700, banks stopped lending money, residential real estate foreclosures hit new highs.  Major Wall Street investment banks like Bear Stearns and Lehman Brothers went out of existence.  The outlook was bleak.

Today we live in a very different world.  Technology jobs are going unfilled.  Housing prices last month rose 6.5% on an annual basis. The stock market is busting out to new high levels with the regularity of a Swiss watch.  The VIX Index which is suppose to measure investor fear is mired near a five year low.  GDP in the second half of 2017 pickup to just under 3%.

But then the is the issue of inflation and how it will impact Federal Reserve monetary policy under new chairman Jerome Powell. Conversely how will Fed Policy influence the foreign exchange markets.  Early signs point higher interest rates and means a strong dollar.

Is Inflation Heading Higher

It has indeed been a long time since anyone worried about inflation.  It was way back in the late 1970’s and since then the world has been on a slow glide path toward obliterating inflation.  For two years in 2015-2016 near zero change took place in overall price levels.

This occured in the face of the Fed injecting liquidity of as much as $80 billion a month into the US economy at the peak of the Quantitative Easing.  The stated purpose of the program was to avoid the real enemy, deflation by aiming monetary policy toward a sustainable 2% annual pace of price increases.

Last the Fed reached it target.  By last December a 2.11% inflation rate was achieved.  Quantitative easing is over and the Fed is now reworking it balance sheet by soaking up all that excess liquidity created over the previous years.  

So What Does This Mean

If you think that inflation is being minimized by organic forces in the economy like technology you would be quite right even though such impact has not been showing up in the overall US productivity.  

There are a few things that have yet to be conquered by technology: housing, healthcare and education. The website ValuePenguin calculates the the average family spends 43% of their gross income on these three areas.  We think this figure is low and for many families it is closer to 60%..

For the past two plus years housing costs have far outstripped the overall rate of inflation. In the top 10 cities for high paying jobs, the shortage of housing is forcing prices to levels often unaffordable.  This puts price pressure on labor rates for those big tech jobs.  So far technology has not created an App to make cheap land in Silicon Valley.  There is plenty of cheap housing in Detroit, but jobs are harder to find.

Based on expected levels of family formations, the housing shortage isn’t ending anytime soon.

Healthcare is another area that stubbornly resists even the most comprehensive efforts to control costs.  With the passage of the new tax bill in December, the Affordable Care Act is effectively being put in limbo by Congress.  The best guess is that healthcare inflation in 2018 and beyond will rise at a faster rate for the next several years.

ValuePenguin tabulates that education costs comprise just 2% of a family budget. This is only true if the family has an average of two small children in daycare.  If we include either private schools or the cost of college, this is a different picture.  The overriding point here is that education cost inflation is raging higher every year.

Price Stability Is Over

Is inflation headed for 4% or higher? Nobody has that answer.  However,  inflationary pressures have already started to mount and that is clear.  Under new Fed Chair Powell, all ears will be listening more closely than ever for chatter about FOMC meetings and post meeting interviews of Fed officials.

For the first time in many years, our money is going on several reactionary interest rate increases in 2018 and that spells good news for owners of US dollars.  

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.4 stars on average, based on 82 rated postsJames Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.




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Economy

Tax Cuts and the US Stock Markets

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The stock markets rise or fall on sentiment, earnings, and economic data. While the initial boost following the US Presidential elections was sentiment driven, the markets held their own as the data flow stabilized and improved in the US and around the world. However, at the current levels, the US stock markets look pricey compared to historical averages.

Key points

  1. The markets are trading at rich valuations even after discounting a favorable tax cut
  2. Treasury Secretary Steven Mnuchin believes market will crash without a tax reform
  3. A few analysts believe that the markets will remain firm even without a tax cut
  4. We believe markets will be vulnerable for corrections if Republicans fail to pass the tax cuts
  5. Buy the rumor regarding tax cuts and sell once the news of a tax reform is announced

Nevertheless, the hopes of a tax reform have kept the markets buoyed. How much can these tax cuts add to the markets and what is the risk if the reforms are watered down or just don’t see the light of the day?

Analysts expectations for the S&P 500

The S&P 500 is expected to end 2017 with earnings of $131 per share, increasing about 10% over 2016. For 2018, analysts expect the S&P 500 companies to collectively earn $145.2 per share.

However, there are differing views on whether these figures include the benefits accrued from the tax cuts or not. If the tax benefits are incorporated, then to what extent.

The most bullish analyst on the street, Morgan Stanley’s chief U.S. equity strategist, Mike Wilson, believes that about $9 of $145.2 in the earnings projection is based on the benefits arising out of a tax cut. On the other hand, the most bearish analyst, Weeden & Co.’s Mike Purves, believes that $14 per share is from the tax cuts.

Let’s take a bullish scenario.

Analysts expect the annual per-share earnings to increase by $15 if the corporate taxes are cut from 35% to 20%.

However, Wilson has only accounted for $9 in benefits from the tax cuts. Therefore, we will have to add another $6, which gives us a figure of $151.2.

So, in the most bullish scenario, at 2580, the S&P 500 is trading at a forward p/e of 17 times.

Factset data shows that the 5-year average and 10-year average forward earnings P/E ratio of the S&P 500 is 15.6 and 14.1 respectively. Therefore, even with the most optimistic scenario of earnings built in, the S&P 500 is currently trading above its past averages.

However, just because its current valuations are above the historical averages will not cause a correction in the markets. But, can a failure to pass the tax cuts start a fall?

What if the tax cuts don’t see the light of the day or are diluted in their effect

Again, we shall consider the most bullish scenario. If the Republicans fail to pass the tax reforms, then the earnings projection for next year will fall by $9, to $136.2. At that level of earnings, the S&P 500 is currently trading at a P/E of $18.9, which starts to look pricey.

What level was the S&P 500 trading prior to the two previous crashes of 2000 and 2007?

As seen in the chart sourced from yardeni.com, the S&P 500 is already trading at a higher forward P/E than 2007. This confirms that we don’t have the comfort of valuations behind us. However, we are still a distance away from entering into a bubble territory when compared with the forward P/E of 24, recorded during the heights of the dotcom bubble. Therefore, a crash might not be in the offing.

How much will the S&P fall if the tax reforms don’t go through

Here again, there are two schools of thoughts. While one says that a failure to ring in the tax reforms can easily plunge the S&P 500, others believe that the stock market is unlikely to fall more than 5%.

Treasury Secretary Steven Mnuchin believes that a lot is riding on the tax reforms. In a podcast with Politico he said: “To the extent we get the tax deal done, the stock market will go up higher. But there’s no question in my mind that if we don’t get it done, you’re going to see a reversal of a significant amount of these gains.”

However, Credit Suisse and Morgan Stanley differ, as they don’t see a market crash even if the tax reforms fail.

“The market rewarded firms with high effective tax rates for only three weeks post-election, but not since,” wrote Jonathan Golub, Credit Suisse’s chief U.S. equity strategist. “For that reason, we do not believe that stocks would be at risk if a deal isn’t struck,” reports CNBC.

In a note to its clients, Morgan Stanley has painted three different scenarios with no tax cuts, modest cuts, and substantial cuts.

Morgan Stanley believes that the markets will only fall by 1% if the tax cuts don’t happen.

What do we believe?

We believe that the US market rally in the past year has been driven by hopes of a fiscal boost and tax reforms. These have kept the sentiment positive. As a result, the markets have risen on favorable economic data in the US and around the world and has not given up ground even when the news was unfavorable.

However, after failing to repeal Obamacare, if the Republicans fail to push through a meaningful tax stimulus, the sentiment will be dented.

That will leave the markets vulnerable to sharp drops on any adverse news because the floor of the reforms and an earnings increase will be lost.

On the other hand, if the tax reforms are announced, the markets are certainly likely to surge in the short-term, however, the bump up is unlikely to last for more than a few weeks. Usually, experienced traders buy the rumor and sell the news. We expect the same to repeat once the reforms are announced.

The markets will correct and the focus will shift to the effects of the stimulus at this stage of the recovery, which has been questioned by many economists. The Federal Reserve may also have to tighten at a faster pace than expected, which may neutralize some of the effects of the rate cuts.

Bottom line – To buy or to sell?

Buy the rumor of a substantial tax cut. However, once the cuts are announced, please book profits in the ensuing buying stampede.

On the other hand, if the tax cuts fail to materialize, keep the buy list ready to enter on any fall, which is closer to 8% to 10%.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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Economy

U.S. Nonfarm Payrolls Unexpectedly Decline in September

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The U.S. job machine slowed significantly in September, as Hurricanes Harvey and Irma ripped through the southern states, disrupting local economies in their wake.

Overall nonfarm employment fell by 33,000 last month, following a revised gain of 169,000 in August, the Department of Labor reported from Washington. Analysts in a Bloomberg survey forecast an increase of 100,000.

The jobless rate declined to 4.2% even as workforce participation rose. That’s a level not seen since 2001.

Signs of wage inflation were present last month. Average hourly earnings rose at a faster 0.5% on month and 2.9% annually, official data showed.

Earlier this week, payrolls processor ADP Inc. said U.S. private sector employers added 135,000 positions last month. Economists had projected 98,000.

Hurricane Harvey made landfall in Texas at the end of August, triggering the biggest weekly spike in jobless claims since 2012. A total of 298,000 Americans filed for state unemployment benefits in the week ended Sept. 2, a gain of 62,000 from the week before.

September was the first negative reading on payrolls in seven years. Hiring is expected to rebound in the fall as the states of Texas and Florida resume cleanup efforts in the wake of hurricane season.

Solid employment growth has been one of the few mainstays of the U.S. economic recovery, prompting the Federal Reserve to gradually normalize monetary policy. The Fed is widely expected to raise interest rates again before year’s end. The Fed’s “great unwind” of its balance sheet will begin this month at a rate of $10 billion.

The report had no immediate impact on the currency markets, with the U.S. dollar index (DXY) rising gradually shortly after the data were announced.

«Featured image from Shutterstock.»

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 464 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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