U.S. consumer sentiment rolls over … the U.S. Dollar is “doomed” according to the Bond King … another tailwind behind the crypto sector … are more lockdowns coming?
There are lots of interesting stories filling the headlines in recent days. So, in today’s Digest, let’s bounce around to some of the top events affecting your portfolio.
***U.S. consumer sentiment falls to a 6-month low
As I write Monday around lunch, markets are deep in the red with the Dow leading the declines at 2.4% down.
Part of today’s selloff is attributable to last Friday’s news about waning consumer sentiment.
Specifically, we learned that consumers are growing anxious – so much so, that worries over rising home, vehicle, and household durable prices just hit a record.
Richard Curtin, the chief economist behind University of Michigan’s index of consumer sentiment, noted that “consumers’ complaints about rising prices on homes, vehicles, and household durables has reached an all-time record.”
Rather than job creation, halting and reversing, an accelerating inflation rate has now become a top concern.
Inflation has put added pressure on living standards, especially on lower- and middle-income households, and caused postponement of large discretionary purchases, especially among upper income households.
The survey found that sentiment readings fell to 80.8 in July from 85.5 in June. That’s the measure’s lowest level since February.
This is important to watch.
Fundamentally, the market has room to run higher, especially thanks to the trillions in new liquidity flooding the economy. But if consumer sentiment turns pessimistic and continues to sour, that could lead to a major inflection point for investment markets.
That’s because negative beliefs about the economy/market can lead anxious investors to fold up their wallets and sell their investments…regardless of what actual market fundamentals are. And that selling pressure can have a material impact on actual fundamentals and related market prices…that causes new anxieties for other investors…that causes them to sell…that further erodes fundamentals and market prices… and so on, and so on.
It’s a self-perpetuating downward spiral that, once started, is difficult to reverse.
We’ll be keeping a close eye on this and will keep you up to speed here in the Digest.
***Meanwhile, another “What the Bleep” story from the bond market
Regular Digest readers are familiar with our “What the Bleep” series, in which we’ve been highlighting stories illustrating just how out-of-whack things are today in the markets.
On that note, have you wondered why Treasury yields have been plummeting while inflation data have been coming in hot?
(As I write Monday morning, this implosion is continuing, with the 10-Year Treasury yield down to 1.19%.)
This is not at all business-as-usual. Traditionally, rising inflation would result in bond investors demanding higher yields to compensate for inflation risk.
Well, Jeff Gundlach of DoubleLine Capital, nicknamed “The Bond King,” says what’s happening has an obvious reason:
Yields are this low because of all the liquidity in the system.
In theory, yields should be higher because the Federal Reserve has signaled that it is considering ending its asset-purchase program, which includes some $80 billion in Treasurys a month. The Fed’s quantitative easing, or QE, has helped support financial markets during the worst of the pandemic-driven disruptions last year.
But the prospect of the cessation of QE and surging inflation, which erodes a bond’s fixed value, should be sparking selling in Treasurys and pushing yields higher and prices lower.
Gundlach, however, said that buying from pension funds, foreign buyers and other investors continues to be robust and is providing substantial support for lower yields…
So, what does Gundlach see as the eventual result of this? Hint: It’s not good for your cash savings.
Here’s what he envisions for the U.S. Dollar:
I don’t want to be overly dramatic but I will use the word “doomed.”
Ultimately, the size of our deficits—both trade deficit, which has exploded post-pandemic, and the budget deficit, which is, obviously, completely off the charts—suggest that in the intermediate term—I don’t really think this year, exactly, but in the intermediate term—the dollar is going to fall pretty substantially, and that’s going to be a very important dynamic.
For context, below, we look at the U.S. Dollar Index. It’s a measure of the value of the U.S. dollar relative to the value of a basket of six major global currencies – the Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound, and Swedish Krona.
As you can see, it’s actually been climbing steeply since June.
Doesn’t this contradict Gundlach’s prediction?
Yes, but here’s his response to that:
It’s a question of what your horizon is.
In the short term, the dynamics have been and will continue to be in place for the dollar to be marginally or moderately stronger.
In the longer term, I think the dollar [is] doomed.
While “doomed” is a strong word, we share Gundlach’s general view about the eventual direction of the dollar. That’s why we’ve been urging investors to move their wealth outside of the dollar into fundamentally superior stocks, gold, real estate, and elite cryptocurrencies.
On that last note, we have bullish news coming from tech darling, Square…
***An asset to protect your wealth against an eroding dollar this decade
As we noted last week, this is a painful moment for crypto investors. But today’s pain shouldn’t be confused with tomorrow’s massive wealth creation.
Last Friday, we learned about another tailwind behind the crypto sector.
Payments processor, Square, helmed by Jack Dorsey of Twitter, announced it is creating a new business dedicated to “decentralized finance,” or DeFi, applications for bitcoin.
Square CEO and bitcoin bull Jack Dorsey said on Twitter late Thursday that the company is “focused on building an open developer platform with the sole goal of making it easy to create non-custodial, permissionless, and decentralized financial services.”
To make sure we’re all on the same page, decentralized finance tokens, or DeFi altcoins, refer to altcoins that don’t rely on centralized authorities like banks. Instead, they use blockchain-based smart contracts to execute transactions. At the moment, the majority are being built on the Ethereum blockchain.
This is great news for crypto investors, as it’s another major sign of mainstream adoption.
It’s also great for consumers, as part of the promise of blockchain and top-tier altcoins is the elimination of middle men, who suck money out of transactions like financial mosquitoes.
If you’re looking for specific DeFi altcoins with the greatest wealth-generating potential, click here to sign up for Crypto Investor Network, helmed by crypto expert Charlie Shrem. This is a corner of the market poised for tremendous growth.
***Finally, could we be seeing a return to lockdowns?
Beginning this past weekend, Los Angeles, where I live, announced a new mandate requiring mask-wearing at all indoor locations, regardless of vaccination status.
It’s not a far jump from here to targeted business shutdowns if Covid-19 cases continue to climb.
On that note, last Friday, former FDA chief, Scott Gottlieb said, “I think we’re vastly underestimating the level of delta spread right now.”
Coronavirus cases in the U.S. have been rising due to the delta variant, with the seven-day average of new daily infections standing at 26,448, according to a CNBC analysis of Johns Hopkins University data. That’s up 67% from a week ago.
The weekly average of new daily deaths is up 26% from a week ago, to 273, according to CNBC’s analysis.
As we’ve been pointing out here in the Digest, the economic reopening has been slowing in recent weeks. The last thing we need now is a relapse into shutdowns, or even hampered growth as people pull back from social activity.
But if that does happen, it will be yet another tailwind behind the tech sector and social-distancing businesses.
We’ll continue to keep you updated on all these stories and more here in the Digest, as well as how our experts suggest navigating these challenging times.
Have a good evening,