PARADIGM SHIFT - Commodities
"The debt is growing faster than the economy. It's as simple as that. That is by definition unsustainable…. And it is growing faster in the United States by a significant margin" - Jerome Powell, November 11, 2019
"China consumed more cement during the 3 years from 2011-2013, than the US did during the entire 20th century. Enough cement to build the Hoover Dam 8,000 times over" - David Stockman, as quoted in "Peak Trump"
“The era of the US dollar’s ‘exorbitant privilege’ as the world’s primary reserve currency is coming to an end” - Steven Roach - Yale Economist, June 8, 2020
Despite epic demand from China, commodity prices are at 100-year lows versus financial assets. Are currencies/financial assets overvalued?
The strong dollar with no inflation has been an enormous tailwind for bonds and equities in the technology, consumer, communications, financials, utilities, and real estate sectors.
The strong dollar makes it hard for high cost US shale companies to compete globally. Energy recently hit a low of -$37 per Barrel in futures markets.
We expect a once-in-a-lifetime paradigm shift from a strong dollar with no inflationary consequences to a weak dollar with inflation.
Similar historical examples include:
- 1931-1933: The Great Depression - FDR repriced gold from $20 to $35, devaluing the dollar nearly 50%.
- 1971: Nixon ends US Gold Standard - dollar subsequently devalued by 30% in 1970's
- 1985-1997: The Plaza Accord - Coordinated devaluation of the US Dollar by over 50% relative to the Yen and Deutsche Mark.