• The US dollar has declined sharply recently, reaching a level not seen since April 2022.
• This decline in the dollar has caused unexpected movements in asset prices, including a rally in gold, silver, Bitcoin, and major stock indexes.
• Due to the falling dollar, interest rates have been pushed down from the short to the long end of the curve.
• Despite inflation numbers coming in lower than expected, the market is anticipating lower future values for the dollar, leading to its current decline.
• The market is pricing at the end of Federal Reserve interest rate hikes, a potential recession, and even deflation as reasons for the dollar’s decline.

Transcript:

Title: “Why the Dollar is Suddenly Collapsing”

The dollar is tumbling leaving many investors scratching their heads and wondering why the dollar peaked in September of 2022 and since then has been on a steady decline but over the past couple of weeks has just fallen off a cliff and is now trading at a level that it hasn’t traded at since April of 2022. Keep in mind April 2022 was when the federal reserves balance sheet peaked as well and April of 22 also marked the peak in the money supply. Now in markets nothing ever happens in a vacuum and so this dollar tumbling is causing asset prices to move in unexpected ways all across the board.

We’ve seen a sharp rally in Gold over the month of July and an even sharper rally in silver. Bitcoin also seems to have caught a bid as well as the major stock indexes like the S P 500, the NASDAQ, the Dow and the Russell 2000 all trading at much higher levels than they’ve traded in months to over a year. It’s also been pushing down on into interest rates everything from the short end of the curve at the one year all the way to the long end of the curve at the 30 year.

To make matters even more confusing this is all happening at the same time as inflation numbers are coming down past expectations with the CPI falling to an unexpected three percent year-over-year and producer prices only hitting a tiny 0. 1 percent annual rise. So what is going on?

Quick announcement I will be speaking at the stock pulse silver Symposium from September 29th through October 1st. I would love to see you there. There will be plenty of time for us to meet hang out get a drink together. There’s going to be a ton of other great speakers there. I’m going to be speaking about the history and the future of sound money.

Love to see you there a discount link for the tickets is linked in the description below. In order to understand why the dollar is falling right now we have to explain the fact that markets are forward-looking so what in the world does this mean?

Well basically investors are are always trying to anticipate where the puck will go not where the puck currently is. For example apple is currently trading at a 190 dollars per share. Now let’s say that you are reasonably certain that the price of Apple was going to be 190 dollars one year from now would you buy that stock?

No it wouldn’t make any sense because that tiny little bit of risk that you’re wrong about that means that you’re taking no potential upside for the risk of being wrong. Might as well just keep your money in cash but let’s say with App le trading at 190 dollars per share you are still reasonably certain that Apple was going to be trading at three hundred dollars per share one year from now would you buy Apple at 190 then?

Of course you would. That’d be a fantastic trade 50 roughly in one year absolutely sign me up but the question is how certain are you about this?

Did you see it in a magic crystal ball and you know for 100 certain that it’s gonna be trading at 300 exactly 365 five days from now? If so you go all in you borrow as much money as you can you Pile in you buy call options on it because you know 100 with certainty that it’ll get there and let’s say you also tell your friends and your family about it so they can get rich off of this move as well.

They start buying in but they also have people that they care about that you don’t know and the word starts to spread and everybody realizes hey in one year Apple’s gonna be worth 300 bucks a share. Well guess what’s gonna happen there’s gonna be so much buying pressure from that certainty that that’s what it will be worth in the future but the price will get bit up higher and higher and higher.

And before a year comes the price of Apple will approach 300 but then something funny happens because once it hits 299. 99 now there’s no longer any incentive to buy the stock there and so that absolute certainty that the future value is three hundred dollars brings that future value into the present. But there’s a problem here because nobody has a crystal ball.

You can’t just look into the future and know with absolute certainty what something is going to be worth so you’re always dealing with expectations about the future value not certainties. The more certain the market is about a future value the faster that future value will be brought into the present and the less certain the aggregate consensus Market is about a future value the less that value will be brought into the present.

So now that we understand how and why the market prices those future expectations of value into the present let’s take a look at the dollar again. It is falling off of a cliff so this is the market expecting and when I say the market this is the aggregate buying and selling and the aggregate potential buying and selling of all Market participants coming together to a consensus through an auction process on the current price.

So that’s what the market is so with the dollar falling over the last couple of days what that’s telling us is that the market expects that the dollar is going to be worth less in the future than it is today and the higher the certainty of that the more that future lower value gets brought into the present and that value starts to crash right now.

The question is why? Well first we have to look at how interest rates affect the US dollar. By the way if you are sick and tired of unexpected moves like this impacting your portfolio negatively you need to learn some of the advanced investing strategies that I teach to all my members in heresy Financial University.

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Link is in the description below over the last couple of years we’ve seen interest rates absolutely Skyrocket from a rock bottom all-time low of basically zero percent to now Trad ing North of five percent. When interest rates are high that is sending a signal to economic actors.

The incentive placed on the individual is to save because in a Fiat system Savers are lenders. That is why in a money market fund or in a savings account more and more today you can get paid higher and higher interest rates not at the big Banks but many savings accounts today are paying north of five percent.

So as an individual as an investor as a corporation you may be looking and saying hey if I take my cash and I invest it I’m taking on risk I invested in the S P 500 maybe I’m hoping to get eight percent but there’s always the chance it goes down instead. But if I save my money and lend it out doing a lower risk option I can get five percent if I loan it to the US government who can always use their Monopoly on violence to tax people and pay me back I can get five percent almost risk-free.

Then the incentive in the system starts to flip towards saving rather than spending. It also affects debt because remember we are a highly leveraged economy. In a Fiat system the government corporations households have tons of debt so as interest rates go up it makes that debt more expensive.

If I keep the debt that I have that means I have to take on new debt to pay off the old debt to just keep the same amount of debt as I take on new debt to pay off the old debt I’m slowly increasing the cost of that debt because the new debt has a higher interest rate.

So more and more of my income is diverted to just servicing the debt and then also if I decide to pay down the debt because I don’t like how expensive it’s getting it’s even more of my income devoted to just getting rid of the debt now.

So we see high interest rates create the incentives in a system for deleveraging and saving and also disincentivizes taking on risk investing hiring people research and development doing things that might have the chance of producing more wealth. But ultimately those are all symptoms wrapped up in a package of dollars being more scarce.

This is why the growth rate of the money supply is currently negative. The money supply is shrinking is something the money supply hasn’t done since the Great Depression. Simply put there are less dollars in circulation today than there were at the peak in April of 2022.

When something becomes more scarce relatively speaking it becomes more valuable compared to everything else so again it incentivizes savings getting dollars disincentivizes spending getting rid of dollars. So dollars are more scarce now don’t worry we’re bringing this all full circle but right now you’re probably pretty confused because I’m talking about how the federal reserve’s action since April 2022 have made dollars more valuable and more scarce.

But when we look at the chart of the dollar the value is falling off of a cliff so what in the world it looks like it’s doing the exact opposite of what you would expect right?

Well how do markets work are they pricing in the current value are they trying to expect the future value? So during this whole time when the dollar was rallying versus other currencies the market was pricing in the future fact that dollars would be much more scarce in the future relative to other currencies because that’s what the dollar Index is measuring.

The Dollar’s value versus other currencies so markets were expecting that in the future there would be fewer dollars. The dollars would be more valuable than the other currencies because of the fed’s actions but the dollar Index peaked and has been falling for months now.

This is not because in that moment the dollar was becoming less valuable than other currencies that’s because the market was expecting that the federal reserve’s future actions would make the dollar less valuable compared to other currencies and that’s what it’s still doing now.

In short the market is anticipating lower rates in the future. It’s no longer pricing in Hikes so the question is why is the market anticipating lower rates?

Three reasons:

Number one it’s anticipating an end to the FED hiking interest rates.

Number two it’s anticipating recession.

And number three it’s anticipating deflation. That’s right not disinflation deflation.

So let’s take a look at all three.

The president president Bullard of St Louis fed is stepping down in August. He will no longer be president of the St Louis fed. He has recused himself from his monetary policy role on the Federal reserve’s Open Market Committee and has ceased all public speaking.

Now I have no idea why he stepped down that news is not yet available as of the time of this recording and I’m not going to speculate on this but it is interesting that he is one of the most hawkish members of the FED.

In may he said rates needed to go up by another half of a point to curb inflation and the FED has only raised rates by 25 basis points since then. He has a fear of replaying the 1970s with the Federal Reserve characterized as lowering rates too early and reigniting inflation.

So he’s long been a member who has encouraged higher rates and he just stepped down. The markets are still pricing in a 92 percent chance for one more interest rate hike this year but they’re not pricing in anything beyond that which means the market is anticipating the Federal Reserve is done raising rates.

But the Federal Reserve only directly controls the FED funds rate. That rate exerts influence on the rest of the yield curve like the 10-year treasury but the FED does not directly control rates like the 10-year treasury.

Yet interest rates like on the 10-year have still been falling lately. This is due to the Market’s anticipation for a recession because even in the free market you will have lower interest rates during a recession. It’s not just from the FED lowering rates artificially to blunt the pain.

Let Me Explain how and why that would happen during a recession prices fall asset prices fall people lose their jobs generally economically it’s a very weak time period with lots of economic pain.

Now preceding a recession and at the onset of a recession you likely wouldn’t have lower rates at the beginning but eventually the market would start to price in the future effects of the recession with lower rates because as people have harder and harder times companies spend less money people lose their jobs eventually the spending stops prices drop and the savings pool builds back up again.

As that savings pool gets larger and larger and larger the amount of money to draw on to spend increases and the cost to borrow it decreases. So you see this part of the chart where the short-term interest rates are really high up to five and a half percent yet the long-term interest rates around 10 years plummet to three and a half to four percent.

That is the market anticipating that the very least a good amount of disinflation but given the fact that we’re already at three percent CPI it looks like it’s starting to price in deflation. With inflation of three percent and a six month t-bill at five is the more certain that future dollar the more certain that future value the more that value is brought into the present.

This is due to the Federal Reserves fight against inflation by tightening things up raising interest rates and making the dollar more scarce and how the expectation by the market is that now that has come to a conclusion the near-term future as a result of that the market is anticipating could very easily be recession and or deflation of course we will see whether that plays out.