The Shifting Sands of Global Finance: Why the US Dollar Isn't the King Anymore

For many years, my financial perspective revolved around the US dollar as the undisputed heavyweight champion of the global monetary system. However, my recent exploration into monetary economics has revealed a more nuanced reality. It turns out the US dollar, while undeniably powerful, is not the sole gravitational force in the global financial universe. Instead, gold, the historical beacon of value preservation, remains the true center, with the US dollar acting as one of the major planets orbiting its influence.

This fundamental shift in my understanding has provided me with a fresh lens through which to interpret financial news headlines. It's not about a "bull market in everything," but rather the weakening of the US dollar over the past year. This perspective is crucial for accurately analyzing global financial trends.

The Dollar's Decline: A Global Impact

Numerous headlines tout the record highs in US stocks. While true when measured in US dollars, these headlines often fail to present a complete picture. To truly compare apples to apples, we must consider how different stock market indices perform when measured in a single currency.

MSCI equity indices, widely followed by professional investors, provide a valuable resource for assessing global returns in US dollars. These indices demonstrate that when all indices are measured in US dollars, US stocks lose ground in terms of their global performance.

The year 2017, frequently hailed as a year of "bull markets in everything," was actually marked by the dollar's decline against most other assets. This trend underscores the importance of considering the dollar's influence when evaluating global financial movements.

Gold: A Beacon in a Sea of Uncertainty

In my global asset allocation and top stock picks for 2018, I predicted a fair value for gold of 1,300 Swiss francs per troy ounce (equivalent to US$1,300 at the time). This prediction is rooted in the historical understanding of gold as a reliable store of value, often compared to the cost of a "fine gentleman's suit." Despite its lack of intrinsic value, cash flow generation, and storage costs, gold stands as the ultimate long-term value preservation tool, providing diversification and serving as long-term inflation insurance within a diversified global portfolio.

The Resurgence of Inflation?

While many may dismiss inflation as a thing of the past, recent trends suggest otherwise. While I am not a self-proclaimed "gold bug," the recent events have deepened my understanding of gold's appeal. Despite the low inflation rates reflected in the US Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE), a deeper analysis reveals a more complex picture.

The subdued consumer inflation, particularly in the price of consumer goods, can be partially attributed to the struggles of the "working class" and stagnant earnings. The lower your income, the more you rely on consumption, leading to a dampened demand for consumer goods and reduced pricing pressures.

However, it's important to acknowledge that other factors, such as automation and globalization, also play a role in curbing consumer goods inflation in the US.

The Growing Wealth Gap and Inflationary Pressures

The increasing income and wealth gaps have led to a divergence in inflation experiences. While the "99%" experiences muted consumer inflation, the "1%" faces higher inflation in services and investment goods that align with their spending patterns.

This disparity further underscores the need to consider the broader economic landscape when analyzing inflation trends.

The US Dollar: Facing a Rising Tide of Inflation

The tightening US labor market is driving up wage pressures, and coupled with the weakening US dollar, this is likely to push US consumer inflation higher in the coming months. This trend is likely to outpace inflation in regions like the Eurozone, creating opportunities for US-dollar-based investors to capitalize on attractive international stocks and avoid hedging foreign currency exposure, particularly against the euro.

A European Outlook

While both the euro and gold have exceeded my fair value targets for 2018, I expect them to continue providing strong returns for US-dollar-based investors. This is largely due to the euro's inherent strength against the weakening dollar. My particular focus remains on German stocks, which have consistently delivered strong performance.

Conclusion: Navigating the Shifting Global Financial Landscape

The global financial landscape is constantly evolving, and it is imperative for investors to adopt a nuanced perspective that acknowledges the influence of factors beyond the US dollar. Gold's position as the ultimate store of value, coupled with the potential for rising inflation in the US, highlights the importance of diversifying investments across a range of asset classes and currencies.

As we move forward, it's crucial to remain vigilant and adapt our investment strategies to reflect the shifting sands of the global financial landscape. This requires a keen understanding of the underlying economic fundamentals and the ability to interpret the information presented by financial news headlines with a critical eye.