The US is the Ultimate Source of Global Liquidity

#dollar #stocks #inflation #commodities


The USD is falling for the right reasons, that is good news for stocks“– Paul Ebeling

The USD fell for the 1st time in 3 yrs in Y 2020 under President Trump’s (45) policies and remains under pressure.

And so far, the USD’s decline has been for reasons that are good news for stock-market Bulls in the US and around the world.

A weaker dollar will boost earnings in USD terms, which is good news for US-based exporters, but USD weakness also reflects extra easy financial conditions, which are Bullish for equities both in the US and abroad, including emerging markets.

We here at HeffX-LTN sees more Southside for the Buck in coming months. Dollar weakness is not just about the Fed and its easy money policies.

One of the more overlooked factors is the deterioration of the US trade balance, a phenom amplified by last yr’s collapse in Crude Oil prices, which is likely to keep a lid on US Crude Oil exports.

Then there is inflation’s effects

Investors, the Fed and businesses continuously monitor and worry about the level of inflation.

 Inflation is the rise in the price of goods and services reduces the purchasing power each USD can buy. 

Rising inflation has a huge effect: input prices are higher, consumers can purchase fewer goods, revenues and profits can decline, and the economy may slow for a time until a measure of economic equilibrium is reached.

In the inflationary scenario value stocks perform better in high inflation frames and growth stocks perform better during low inflation. Today, and for the foreseeable future the US is in strong economic and inflation frame that is drive recovery stocks to higher highs and higher lows, that is Very Bullish.

High inflation can stimulate some job growth. But high inflation can impact corporate profits through higher input costs.

Stocks are often broken down into subcategories of value and growth. Value stocks have strong current cash flows that will slow over time, while growth stocks have little or no cash flow today but are expected to gradually increase over time.

So, when valuing stocks using the discounted cash flow method, in times of rising interest rates, growth stocks are negatively impacted far more than value stocks.

This suggests a positive correlation between inflation and the return on value stocks and a negative 1 for growth stocks.

When we divides stocks into growth and value categories, the historical evidence is clear that value stocks perform better in high inflation frames, and growth stocks perform better during low inflation.

A Key way that we here at HeffX-LTN predict expected inflation is to analyze the commodity markets, the tendency is to think that if commodity prices are rising, stocks should rise since companies produce commodities. But, high commodity prices often squeeze profits, which in turn reduces stock returns. So, following the commodity market provides insight into future inflation rates.

Have a healthy day, Keep the Faith!