Similarities between the U.S. Dollar's top in 1985 and today

The U.S. dollar topped in early-1985 and then cratered. We published a new webpage explaining why.
Money Flow determines the U.S. dollar’s bull and bear markets. Money Flow is an extremely complicated concept that includes many factors:

  1. Interest rate differentials
  2. Difference in corporate profit opportunities.
  3. Difference in investment opportunities (stocks, real estate, etc)
  4. Political stability.
  5. Inflation (click here to see how inflation impacts the U.S. Dollar).

Right now, Money Flow is moving away from the U.S., just like it did in 1985. But unlike 1985, Money Flow isn’t moving away from the U.S. at such a rapid pace. Hence, the USD probability will not collapse like it did in 1985-1990. Instead, the USD will probably go down slowly.

Money Flow away from the U.S.

Europe’s economy is rapidly recovering after a 2 year downturn (2014-2016). Money is flowing from the U.S. to Europe. You can see this via the massive net inflows into European equities, which are outpacing inflows into U.S. equities.

The U.S. dollar topped in early-2017, just when inflows into European equities started to rise.
*Jeff Gundlach and other big hedge fund managers started to pile European equities in February-March 2017.
According to our contacts, China will likely make a fiscal push in late-2017 or early-2018 after their once-in-5-years Congress meeting.

After 5 years of internal political maneuvers, Chinese President Xi Jinping has finally gained complete political control in China. Based on our contacts in Beijing, President Xi will make a big effort to push the Chinese stock market/economy higher after the Communist party’s October 2017 congress.

China’s economy is heavily influenced by state policy. China’s economy has slowly improved over the past year after sinking from 2014-2016. The pace of China’s economic resurgence will increase if the government makes a fiscal push.
Emerging markets (BRIC, Southeast Asia, etc) are close to breaking out from a multi-year consolidation.

Inflation is on the rise. The recent slowdown in U.S. inflation is transitory. If the economy continues to grow at its current pace, U.S. unemployment will reach approximately 3.7-3.5% in 2018. The last time unemployment was this low (mid-1960s), U.S. inflation started to surge. This is economists’ definition of “full employment” (NAIRU).

Historically, rising inflation has either caused the USD to swing sideways or fall. At the very least, rising inflation is not bullish for the U.S. Dollar Index.

Bottom line

We agree with our sister fund: the U.S. dollar is in a bear market. As the U.S. dollar steadily sinks over the next 2 years, U.S. earnings will be given a boost starting in Q4 2017. This is a long term bullish factor for the U.S. stock market.
*The USD’s year-over-year change impacts U.S. corporate earnings because half of U.S. corporate sales come from overseas.
For more on the stock market and USD’s history, go to our history webpage.

1 comment add yours

  1. Troy, once again your analysis and detail are much appreciated. I find myself looking forward to these posts in my email. I’ve scrolled through with a bit of your past material and have decided to put some “casino money” in my account to follow along with your model in the next correction. I’m a fairly conservative dividend growth player with the egg but have been successful taking some risks in the P2P lending and crypto parlors, now I’ll try a shot tagging along with your blog. Please keep the posts coming, looking forward to reading more of your insight. Cheers.

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