THE BOTTOM LINE: Trump's dollar woes and the misguided Fed

This week:

  • Several months after the election, President Donald Trump said that the US dollar was “getting too strong,” and attributed the strength to investor confidence in him. The dollar has since slipped considerably, recently hitting its lowest level since January 2015. Business Insider CEO Henry Blodget discusses how a weak currency can actually help boost the exports for multinational companies, and looks at the reasons behind the dollar’s decline. Now that the greenback is lower, it perhaps suggests a loss in confidence in Trump’s economic agenda.
  • Blodget breaks down bitcoin’s surge to another record high this week, which has spurred more questions around how high it can go. The cryptocurrency has doubled in August alone, further fuelling the argument that it’s a speculative bubble. If you choose to invest, the best way forward is to focus on bitcoin transactions, and note the similar meteoric rises in other cryptocurrencies.
  • In the Fidelity insight of the week, Business Insider executive editor Sara Silverstein looks at a recent research note from the firm exploring why a lower unemployment rate hasn’t resulted in higher wages. Fidelity says that the link between unemployment and inflation is weaker than it used to be, citing the Phillips curve. The firm argues that we’re now close to full employment, which means wage inflation will come, although the peak for this cycle will be low compared to history.
  • Dr. Komal Sri-Kumar, the president of macroeconomic consulting firm Sri-Kumar Global Strategies, spoke to Blodget about Federal Reserve interest rate policy. He argues that the Fed’s insistence that we’re facing an inflation threat is wrong, and says that inflation won’t be a problem anytime soon, considering how the central bank is handling matters. He notes that the core PCI deflator, which is what the Fed supposedly focuses on, has fallen to the lowest since 2010. Sri-Kumar argues that the Fed is “out to lunch” and says that there’s nothing to suggest inflation is going to 2%. He thinks the Fed should have started increasing interest rates at a faster pace years ago, and recommends that the central bank hike rates by 0.75%, even though markets won’t like it. If the Fed does that, it will remove the speculative bubble from markets and allow fundamentals to take back over.
  • In terms of what the Fed will actually end up doing, Sri-Kumar predicts that it will do slight “Mickey Mouse tightening,” with a minor hike in December, and then wait months to do another one. He’s keeping an eye on the spread between the 2-year and 10-year Treasury yields, which has historically signalled a recession when it narrows down to zero. Overall, he watches the bond market for hints at a potential recession to come. Sri-Kumar goes on to forecast that consumption will remain very weak, and recommends that banks extend more credit, because a lack of lending fails to create inflation. In terms of stocks, he predicts that a slowdown in earnings growth could jolt the market downward, as could global uncertainties. Lastly, he recommends high-grade Treasuries, as well as high-grade mortgage-backed securities, and is looking for opportunities in Germany. Sri-Kumar also sees distressed as an area ripe for growth, highlighting Italy as offering potential.
  • Blodget discusses the aftermath of the Amazon-Whole Foods deal, highlighting the price cuts made at Whole Foods stores. He notes that the stocks of competing grocers have taken a beating, selling off any time there was a new announcement from Amazon. He mentions comments from a Morgan Stanley analyst, who thinks the new Whole Foods has the ability to close the pricing gap between it and its competitors. Blodget then points out that Amazon shows that a company doesn’t necessarily need to maximise profits to see share gains.

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