Two Conflicting Views on the Dollar
September 2, 2015
The dollar had done well since the spring of 2014, and widely different outlooks surrounding Fed monetary policy and the stances at other central banks generated great optimism toward the dollar at the turn of 2014-2015. The policy polarity was underpinned by a stronger growth trend in the United States than Europe or Japan. One part of the general financial market volatility this year has been the stalled dollar uptrend, including some backtracking in some key bilateral relationships.
One view of the dollar prevailing now is that appreciation will soon resume. Stock markets were overdue for a correction, and uncertainty will be less pronounced once the Federal funds rate gets past that first cyclical increase. Strengthening global growth will not take away America’s relative advantage, and the U.S. currency will benefit as short-term money market differentials and long-term spreads move more decisively in the dollar’s favor. This upbeat view of the dollar expects oil and other commodity prices to stabilize at higher-than-current levels and sees inflation rising to more normal levels.
A more downbeat dollar prognosis emerges from a pessimistic view both of the U.S. and world economies and also of the appropriate level of U.S. equities. As a starting point, this view to which I am increasingly gravitating is less sanguine about the U.S. economic performance not merely in the current expansion that started after mid-2009 but in trends that shifted abruptly at the start of the 21st century.
- U.S. nonfarm labor productivity had kicked into higher gear in the 1990s, averaging almost 2.5% per annum growth in 1990-07. That pace was halved at the onset of the Great Recession and never really recovered. It has averaged under 0.6% a year since 2011 including 0.7% over the latest four reported quarters. This age of technology has evolved in two great waves. Productivity strength in the 1990s was associated with the use of personal computers by businesses and households. The second wave centered around mobile devices is associated with the proliferations of Apps affecting what consumers do with their time. The two decades that have elapsed since the internet came into people’s lives constitutes a long-run block of time by any measure, and so it’s apparent that the two technology wages have delivered similar benefits to U.S. economic performance and is unlikely to do so.
- U.S. real GDP advanced 3.4% per year between the end of 1974 and end-1999 but just 1.8% per annum subsequently and a pace of 2.2% in the six years of the present expansionary stage of the business cycle.
- A slowdown of U.S. population growth from 1.08% per year over the final 25 years of the 20th century to 0.87% since end-1999 doesn’t fully explain the near halving of real economic growth.
- Growth in jobs has downshifted even more severely than that of real GDP. Nonfarm payroll employment grew 2.1% per year from end-1974 to end-1999 but merely 0.5% so far this century.
The stock market has adjusted to the weakening U.S. economic performance norm. From a cyclical high of 11,723 on January 14, 2000 to the present, the Dow Jones Industrials Average rose at a pace of 2.1% per year, down from 16.9% per year from 777 on August 12, 1982 to the January 2000 high. The adjacent time blocs of 20+ years followed by 17+ years each constitute long-term blocks of time of comparable length. But even 2.1% might be too much following 17 years of 17% annualized growth and in lieu of how much less impressively the economy is now performing than it did in the second half of the 20th century.
Consider, too, the build-up of U.S. economic imbalance. The infrastructure has gone into disrepair. Private-sector debt, which rather than government debt was the real villain of the last financial crisis, is hovering above 195% of GDP, nearly 10 percentage points above where such stood in 2000-04 and even more distant from 182.4% in 1995-99. The Great Recession didn’t provide the needed cleansing. Meanwhile, ultra-loose monetary policy and, more importantly, the nature of the mobile device revolution, have promoted an extreme polarization in the distribution of incremental growth and outstanding wealth, leading to less socially sustainable living. Finally, the plunge in oil prices is postponing steps to diversify away from dependence on fossil fuels.
The second view of the dollar sees recent market volatility not as an interlude but rather as early days in a longer process. One inference is that stocks are in a bear market, not a correction. Another is that the Fed will have a lot of trouble staying the course of gradual interest rate hikes. A third is that the election of 2016 will be a wrenching experience to the cohesion of American culture. And finally, if the path least resistance in dollar’s euro and yen values has been downward in 2015, there may not be much happening in the coming 12 months to resume the previous dollar advance.
Copyright 2015, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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