Monday 16 May

The dollar

I always think of a price as a ratio. The ratio between the value of the thing (a house, an hour of work, an Amazon share), and the value of the currency in which it is denominated. The dollar has been on a tear recently, relative to, for example, the Euro. This means that in Euro terms, commodities have been doing relatively better. The biggest commodity of all, oil, has managed to make headway in spite of the stiff headwind resulting from the strength of the dollar. The link between oil and the dollar goes back a long way: to 1945, when Franklin D Roosevelt made an agreement with Saudi King Abd al-Aziz. Saudi would get various privileges, including training and arms, in exchange for pricing oil in dollars. The USA had seen what had happened to Britain, and its oil interests in Persia, and was not going to make that mistake.

It’s vital, for US interests, that most international trade is conducted in dollars. I am sure that any trade partner of the USA is well aware of the bad consequences of trying to conduct trade in another currency. OK, maybe Russia will sell to China in a non-dollar currency, but this will not be a lot in global terms.

If global trade declines, which seems likely, the supply of dollars will decline. The USA runs a chronic current account deficit, which is balanced by the USA supplying the world with “safe assets” (as defined by the BIS). Although the USA will continue running a deficit, as world trade slows, it will be less in absolute terms, and therefore will represent a tightening supply. This will work in tandem with the Fed which must, surely, soon start to reverse QE.

All this, I think, foreshadows a continuing strengthening of the dollar, which will tighten overall monetary conditions in the US and just might lead to a soft landing … or maybe a hard one. I don’t suppose the Fed really knows, but it can’t admit this as then it would lose it’s trump card: the illusion of infallibility and omnipotence.

When countries lose control of their own currencies, they us someone else’s. Invariably, unless they are bound by colonial ties, they choose the US dollar, just as the world learns English as a second language, when it happens not to be their own. Anyone can dream up a new currency. The trick is convincing others to accept it as a store of value. Do Kwon, the mastermind behind Terra/Luna is finding this out the hard way right now.

Wrap

This was another risk off day. The dollar was down, although DXY is still over 104. Indexes were generally down, with $NDX more than $SPX. High-beta, long-duration stocks like $TSLA and $ZOOM being hit hard. Oil was up, as were most commodities, with the exception of a few illiquid ones like lumber (which was down 13%).

The Nasdaq is now looking pretty sick, as you can see:

Image

Henri de Toulouse-Lautrec pic.twitter.com/oIFU0qUZKM

— Daniel Brami (@Daniel_Red_Eire) May 16, 2022

Tweet of the day

For a year or so, @matt_levine (former M&A lawyer, investment banker, & brilliant writer) has had a tolerant, begrudgingly admiring, & almost bemused attitude toward @elonmusk's antics. No more. His last two notes re $TWTR deal have been brutal. Wake up, @SECGov. From today's: pic.twitter.com/geKMrJcBhs

— Montana Skeptic (@montana_skeptic) May 16, 2022

Note: I try to avoid saying anything about Elon Musk, but maybe you can get a idea about that by reading what Montana Skeptic has said about him over time.