Out of the Box: A Dollar Here, A Dollar There
Just one year ago the Dollar/Euro was 1.2233. We have had a massive move during the last twelve months. We closed last night at 1.1157 which is an 8.8% strengthening of the Dollar. When the Dollar hit 1.1400 in mid-March, I said that the Dollar had further to run and projected a move to under 1.1200 to 1.1000 and I think the Dollar may even break out of that range and head higher now.
“Strange… how you manage to always be in the right place at the right time.”
-A Fistful of Dollars
My projections are based partially upon the economy in the United States as compared with Europe. However, there is more to the story. A significant amount of Dollar appreciation followed on the heels of the Fed’s backflip on interest rates. I do not expect their position to change anytime soon, so I see this as providing support to the American currency.
“Change is good but Dollars are better.”
My thoughts also center around Brexit and while delayed for the moment, something will happen, at some point, and I expect it to be a mess. Also, I see the forthcoming EU elections as far more dangerous than most people. I expect the populists, the nationalists, to gain a significant share of the seats and I believe it is even possible that they will get the majority of the seats.
In either case, it will end the balance of power, between Germany and France, in running the European Union, as they like, and I expect a massive blow back from Italy, Hungary, Poland and other countries. If I am correct, and we see a major power shift in the EU, then the Dollar will even strengthen further and perhaps may head for parity.
A strong U.S. Dollar could be bad for large-cap multinationals because it makes American goods more expensive overseas. If the U.S. dollar continues to appreciate, then it could also have a negative long-term impact because those overseas consumers will begin to turn away from the goods and services of large American exporters. The sectors impacted most by a strong Dollar are technology, energy, and basic materials. There are large-cap names that could see a hit to their earning that go well beyond these three sectors, however.
“Once you start to really think about money you realize this stuff gets handled A LOT! Who had it before you and what did they do with it? It gets put in places you may not want to know about.”
Higher-yielding U.S. debt is also luring investors to the Dollar. While the rate on 10-year Treasuries fell more than four basis points on Wednesday to around 2.52%, it’s still the highest among major developed-market peers. Comparable yields in Germany and Japan are below zero. It is not just Treasuries either but both American Investment Grade bonds and High Yield bonds that are attracting money from overseas. Looking at the actions of the other major central banks, I see no imminent turn to this trend which is one reason why I think that American bonds have further to go in higher prices and lower yields.
I do continue to have some concerns about the U.S. Agency market. First there is a lot of push and pull about privatizing the Agencies and there is some amount of “Risk” on the table here. If privatized, they would certainly widen out against Treasuries, in my opinion. I am also mindful of some of the recent statements by members of the Fed. They seem to be heading in the direction of just buying Treasuries and either letting their Agency holdings mature or perhaps they may even begin a selling program. This further supports my view that MBS bonds and other Agencies bonds may widen, and perhaps significantly, so I remain very cautious about this space.
The other side of my general bond bullishness is the equity markets. Lower yields may prompt more people, and institutions, to try to increase their returns by adding more equities to their portfolios, and adding more “Risk,” in the process. I think that equities trend higher, even from here, but the major “Appreciation Plays” may not do as well as expected. I remain somewhat cautious. I am not negative on equities, just cautious, as I said.
The one area that I continue to think will do quite well are the companies attached to the new 5G Rollout. I expect both revenue increases and profit increases in many of the tower, chip, cell phone makers, wireless providers and even some REIT’s, with tower company properties. Bonds or equities, I am very bullish about this space. You may wish to examine your portfolios and see if you have an adequate amount of companies attached to 5G, as they could increase in value substantially, in my estimation.
Mark J. Grant
Chief Global Strategist, Fixed Income
B. Riley FBR Inc.
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