Investor | Family Office CIO | Portfolio Strategist | Board Advisor | VC | Finance Professor
The Microsoft 320 short idea is a beauty now that MSFT has fallen to 225. This is just a valuation compression due to interest rates. Once the overleveraged consumer rolls over, I believe MSFT will fall to 150.
The modern era of floating exchange rates began when President Nixon suspended the US dollar’s $35 an ounce Bretton Woods peg to gold in August 1971. “Our currency, your problem”, Nixon’s Texan Treasury Secretary boasted to the world.
Fast forward to 2022. The world is paying an extremely high price for the 20% rise in the trade weighted US Dollar Index since mid 2021. Since imports are only 12% of US GDP and 95% of US imports are invoiced in the greenback, a fall in the US dollar has minimal impact on the US inflation rate. Yet King Dollar has wrecked havoc in Europe, Asia and the EM.
The Biden White House has argued that it will not intervene in the world currency markets to slow the ascent of King Dollar because this would undermine the Federal Reserve’s anti-inflation mission. This argument makes no macroeconomic sense since even a 10% fall in the US dollar Index would increase the inflation rate by only 0.30%. The inflation risk of King Dollar is entirely asymmetrical for the rest of the world, where a plunge in local currencies means a sharp rise in the inflation rate and forced monetary tightening. Emerging markets have paid a terrible price for King Dollar’s bullish rampage. Even the strongest Asian economies have not been immune to the trend. The South Korean won is down 16% against the US dollar in 2022.
India’s foreign reserves have fallen almost $100 billion to $496 billion and the RBI has raised its repo rate 4 times to defend the rupee and contain a surge in domestic inflation. The bank of Japan’s intervention red line at 145 yen has now once again been retested by the foreign exchange gnomes with total impunity. The sterling crisis has convulsed Britain’s government bond market and forced the Bank of England to intervene to prevent horrific losses in the UK pension fund industry. The Biden White House’s indifference to King Dollar will accelerate the onset of global recession and it is unrealistic for the world to hope for a new Plaza Accord. “Our currency, your problem” is as accurate a reality in international finance in 2022 as it was in August 1971.
The credibility of the Powell Fed is at stake with the US inflation rate at a 40 year high and the real Fed Fund rate is still deeply negative at 3.25%. There is no way that Biden can or will engineer a global monetary experiment like a new G7 summit to bring down the dollar at a time when his approval ratings are so low, OPEC+ has just cut its crude output by 2MBD and the Powell Fed has not remotely won its war against an inflation virus that has now broadened into a wage/rent/services spiral. My call? There will be no Plaza Accord to bring down the buckeroo in 2022 and the US Dollar Index is headed to 1.20. Biden’s message to an anguished world? Drop dead.
Also published on Medium.