Investors Are Liking The U.S., For Now

The quote of the morning.

Christopher Smart, Chief Global Strategist at Barings and head of the Barings Investment Institute, is quoted in the Wall Street Journal:

“The U.S. looks the least challenged in a very challenging world.”

“Everybody is slowing down, but the U.S. because of the continuing strength of the jobs market, still seems to be slowing more slowly.”

This is the basic conclusion that I drew in my last post “The U.S. Dollar: What It Is Telling Us.”

“The concern is that the world could move into a global recession accompanied by prices that are rising faster than anyone really wants.”

“Traders seem to be telling us that, relative to the United States, other countries and geographic areas are not expected to do very well in the near future.”

“But, traders also seem to be telling us that the United States is not expected to do very well in the near future, either.”

In other words, the markets seem to be telling us that the U.S. is doing as well as it is because it is doing “less worse” than everybody else.

The U.S. dollar is soaring in world markets and, as we hear from Hardika Singh in The Wall Street Journal:

“Investors have added money to U.S. equity-focused stock and mutual funds for four of the past six weeks, according to Refinitiv Lipper data, while yanking money from international stock funds for 20 consecutive weeks.”

“That’s the longest streak since a 22-week run of outflows that ended in October 2019.”

The U.S. is a haven and right now it seems to be about the only “haven” working in the world.

So, lots of money is flowing into the United States.

That’s good.

But, it is also a growing challenge for U.S. policymakers.

This Money Is Not Stable Money

Although it is good that investors around the world seem to think that the United States is the primary currency haven in the world and this is where they want to put money when they are concerned about how risky everyone else is.

But, what must the Federal Reserve and the federal government do or be prepared to do, given all this cash flowing into the United States?

The strong dollar is fine and, in my mind, it is something that American policymakers should hope to achieve and maintain.

A strong dollar policy should be consistent with a sound fiscal policy and a focus upon building up the supply side of the economy.

The government should be concerned with building up economic productivity, not will just building up spending power.

If the government is not focused upon building up the economic productivity of the United States, then it, the government, will not be preparing the country to lead the world as an economic powerhouse that is consistent with the strong value of the U.S. dollar.

The maintenance of the strong dollar will not be sustainable without the strong, economically powerful economy.

And, if this is the case, the strong dollar cannot continue to be supported and, as world conditions change, money will flow right back out of the country and the U.S. dollar will fall in value.

The only thing that would keep it from falling would be a continued shortfall in the economic policies of other countries. Then the world would really be in trouble.

In other words, the United States, right now, has a major opportunity, one that does not occur very often, to build on the current strength of the dollar and make the currency an even stronger reserve currency in the world.

But, this new strength will only be maintained if the U.S. government moves to build and support an economy that is the envy of the world in terms of innovation and productivity.

The opportunity is there, but will the government take advantage of its current position to build the “new” economy?

Oh, building the “new” economy will take time, but if the world sees the United States moving in that direction then the value of the U.S. dollar will remain strong and the economic position of the United States will be enhanced.

This narrative is the “best” outcome the U.S. could wish for.

Obviously, if the U.S. government does not act and the current strong dollar is not supported then the current situation deteriorates, over time.

Short-Term

The money now coming into the United States is just short-term money.

Yes, it is putting the U.S. dollar in a very prominent position, one that will be referred to often in the future.

But, the result of this picture will not be so good.

If the U.S. does not follow up and support the strong position of the dollar, money, at some time, will begin to flow away from the United States and the Federal Reserve will be faced with a rapidly declining value of the dollar.

A rapidly declining dollar will have impacts on other financial markets and given the growing financial weakness being felt in the U.S. economy, the U.S. could find itself in a cumulating cycle.

This is not something the government wants, nor is it something we would want.

In this case, the current strong dollar exposes the United States to possible downside weakness in the financial markets.

Here, we are in another scenario where radical uncertainty plays a big role.

The strong U.S. dollar is something, I think, the United States should really want and support.

But, a strong U.S. dollar is going to require support on the side of economic productivity. The government is going to have to realize this and come to support it.

The U.S. dollar is strong because other countries are in worse shape than the U.S. economy, not because the U.S. economy is strong.

This is going to have to change!