Dollar Dive On Fed Boosts Outlook For Exports, Corporate Profits [DEVALUTATION + DEFLATION]

Investors Business Daily ^ | March 18, 2016 | JED GRAHAM

[expat_panama]

The dollar fell sharply for a second straight day to five-month lows Thursday on the Federal Reserve’s less-ambitious rate-hike plans. That in turn boded well for corporate earnings, lifting the S&P 500 to its highest level of the year.

The Fed signaled Wednesday that it wants to make sure the economy builds up some momentum before it resumes normalizing interest rates. That was a much more inviting message than in December...

...a strong dollar, weak earnings, tepid growth and a plunge in commodity prices that raised fears of emerging market defaults.

The central bank indicated that it now sees only two hikes this year...

...The weaker dollar is positive for the export sector’s competitiveness, provides a boost to earnings for companies sell a lot of their products overseas and should ultimately lead to more capital investment in the U.S., said Steve Blitz, chief economist at ITG Investment Research.

The S&P 500, home to multinational giants, rose 0.7% to its best level since Dec...

...The Fed’s statement on Wednesday noted net exports and business investment as two economic soft spots.

Yet the U.S. manufacturing sector, which has been stabilizing, may be showing early signs of an upturn...

...The dollar typically appreciates “whenever there is a flight to safety,” said Sara Johnson, IHS Global Insight research director, so it’s not surprising to see a reversal in flows amid an improvement in confidence in the global economy.

“The risks are still lurking but...

...The euro has been rallying against the dollar since the ECB cut its interest rate on bank deposits further into negative territory but President Mario Draghi indicated that further interest-rate cuts weren’t expected...

...the dollar “is set for a multi-quarter decline, correcting a sizable overshooting.”

[expat_panama]

What's happening is that after yesterday's Fed's keeping interest rates low, we also got a dollar devaluation along with deflation:

This flies in the face of what everyone 'knows', that QE devalues the dollar so everything costs more and the middle class dies.  Ah, and depending on your politics it's all etiher Bush's fault or China's fault.

[expat_panama]

 

Happy Friday and we're RICH!   Silver's up to a new year's high ($16.05), gold's up at $1,255.56, and the S&P500's also at a 2016 record!  The futures heat map says all commodities are up w/ metals leading +3.01% and stock indexes respectable w/ +0.87%. 

The only econ stat today is Mich Sentiment (aka consumer sentiment) and the news headlines are as always entertaining:

 

Why Canada Is Dumping Gold -- and China Isn't - Stephen Mihm, BV
Everywhere You Look, There's a Dollar Shortage - Jeffrey Snider, RCM
The Fed Just Gave a Big Green Light to Buy Stocks - Bryan Rich, Forbes
Yellen's Fed Is Impaled On Its Own Petard - David Stockman, Contra Corner
The Worrying Dovish Tilt of the Federal Reserve - Mickey Levy, E21.com
Something Is Still a Little Off In the U.S. Labor Market - Myles Udland, BI
Public Pension Promises Exceed Ability to Pay - Mary Williams Walsh, NYT
The Mystery of America's Missing Capital Investment - Peter Coy, BBW
China's Optimistic High-Income Future - Erik Berglöf, Project Syndicate
New Light on the Dark Arts of Chinese Finance - Peter Thal Larsen, Reuters
Why Buy-and-Hold Is a Bad Idea for Retirees - Ken Moraif, MarketWatch
A $10 Trillion Stat Destroys Popular Stock Market Myth - Sam Ro, Yahoo
The Myriad Benefits of High Frequency Trading - Stephen Kirchner, AFMA
How I Went From Wall Street to Working at Waffle House - CNNMoney

[Cowboy Bob]

Yes. We must devaluate the dollar in order to compete with Japan, Korea, China, India, etc. But how did these countries become economic powers? Because the US gave the technology. Now they are using their cheaper workforce to undercut our products. We are now forced to cut salaries to compete with the monsters we created.

[Alberta's Child]

I don't think the "US" really "gave" them anything at all.

Companies went over there and built manufacturing facilities -- many of which were simply newer and better than what they had here.

[bert]

——But how did these countries become economic powers-—

because the historical event of WW II that destroyed their economies is over and normalization and growth could take place. that growth results in competition with the USA

We did not create monsters, the foreign economies recovered from destruction.

The USA’s few decades of economic domination were historical anomaly and certainly not the normal state of the global economy

[palmer]

The way it works (as you know) is that low rates distort the credit markets. The lower the longer the more distortion. You are also aware that Europe is continuing and increasing their QE. It doesn't matter if we do QE or they do, it is damaging either way because it distorts the markets proportional to the amount. When they said they would stop monkeying with rates a year the dollar took of as your chart shows. The reason is very simple, the prior QE and low rates created a market distortion resulting in money loaned to the stupidest places on earth, like China and even Zimbabwe.

Then the central banks threaten to turn off the spigot. That extra money returns home quickly causing crashes in those economies and commodity price retractions since a lot of the same money is turned into commodity speculation. The dollar soars creating a rush to the exits in the foreign markets exacerbating their crashes. Then the stupid banks panic and start the whole process again. Except this time the economy is even more hollowed out. There hasn't been substantial long term investment here for decades. That's because despite all the prattle about deflation there is no way anyone can trust that the dollars they tie up in long term investment will not be undermined. Part of the foreign booms and busts also exacerbates our trade imbalance.

I am long past tired of this state of affairs. That's why I am voting for Trump (although I voted Cruz in the VA primary). I don't care anymore what Trump says or does. The system is broken and he is the grenade to finish it off. Of course that won't happen cleanly, there will be random unintended damage. But I have no doubt he will make America great simply by welcoming back companies and their revenue to our shores and the stupid central bank policies won't matter as much.

[Alberta's Child]

Excellent post.

[expat_panama]

...they are using their cheaper workforce to undercut our products. We are now forced to cut salaries to compete with the monsters we created.

...foreign economies recovered from destruction.

Yelling "ain't-it-awful!" may be a way of life for many people but it's delusional. 

We keep hearing folks say that back in 1950 most econ activity in the world happened only in the U.S. and now it's about 3/10ths.  The fact is that back then Europe was in ashes and Asia was radioactive and having the rest of the world better off is good.  We're better off too; average individual wealth and income for Americans has been doubling every three decades.  That's also good.

[expat_panama]

...low rates distort the credit markets....

Somehow that sounds as weird as saying "low prices distort consumer markets".

I don't care anymore what Trump says or does. The system is broken and he is the grenade to finish it off.

Wait a sec., still laughing --mostly at myself because I'm not sure it's a very good idea that I'm agreeing with you so much...

[palmer]

Consumer markets can be distorted also, the result is overconsumption. But that is a mild problem compared to over-investment. We have known for centuries that crowds can overinvest and create bubbles. Those used to be primarily overconsumption leading to over-investment. Now with credit the over-investment problem is magnified. The central banks are only making it worse. Their intent is to stimulate the kinds of investment that they want. What they end up with is the types they don’t. They act shocked when China builds more unneeded capacity and there are commodity bubbles.

[Sequoyah101]

“Dollar Dive”? Isn’t this just a little bit dramatic?

On the whole the index looks pretty flat since mid ‘15 wandering only 2 to 3 index points for the last year.

There was more like a dollar boom in late ‘14 to 1Q’15 that has settled in.

I’m very weary of these sensationalistic and unfounded headlines that are designed to cause a lurch of emotions and are simply designed as click bait by ignorant children.

Does everything have to be a crisis, emergency, urgent, gut wrenching, awesome, jaw-dropping or otherwise sensational? Can’t there just be news and information?

Fact is the dollar index is down slightly but it is not a crisis or dive. If it were a crisis the market would not go up but go down as it did at the first of this year in response to dollar decline then.