Having mocked those who are not balls-deep invested in stocks earlier this week from Davos – “investors holding cash are going to feel pretty stupid” – billionaire hedge fund manager Ray Dalio has taken aim at US Treasury Secretary Stephen Mnuchin in his latest letter.
Regarding Treasury Secretary Mnuchin’s comments about the administration’s weak dollar policy, I want to make sure that you understand what having currency weakness means – most importantly, it is a hidden tax on people who are holding dollar-denominated assets and a benefit to those who have dollar-denominated liabilities.
More precisely, a weak currency:
1. Reduces the currency holder’s buying power in the rest of the world (e.g. dollar weakness reduces Americans’ buying power relative to foreigners’ buying power)
2. Devalues the debt denominated in the weakening currency, which hurts the foreign holder of that debt
3. Supports prices of assets denominated in that currency (because of the currency weakness), giving the illusion of increasing wealth
4. Raises a country’s inflation rate
5. Stimulates domestic activity
None of this is what the U.S. economy needs now.
While it’s described as a desirable and intended thing, it might not be a choice.
The size of dollar holdings of reserves (in dollar-denominated debt) and the dollar’s role as the dominant world currency are anachronisms and large relative to what one would want to hold to be balanced, so rebalancings should be expected over time, especially when U.S. dollar bonds look unattractive and trade tensions with dollar creditors intensify.
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Gluskin Sheff’s David Rosenberg noted an odd coincidence…
And we know how 1987 ended (after stocks soared and the dollar crashed to start the year)…
Remember, nothing lasts forever…
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