King Dollar Has Returned; What Problems Lie Ahead?

Here’s hoping that everyone has a great year of trades in 2015!!!

But in order to make consistent gains, one needs to know which way the stock market will go in 2015? There seems to be little doubt among most investors and traders that the movement of the US Dollar will be a key influence on US Equities in 2015.

The KING DOLLAR camp proclaims that a strong dollar is good for the US because it keeps imported inflation in check, attracts foreign capital and keeps interest rates on loans at a low cost to businesses and consumers. This same camp also points to the benefits of lower energy costs since oil and all commodities are priced in dollars.

On the other hand, there should be worries and concerns about a dollar that is too strong…for one, the US government carries a massive $18+ Trillion in debt, the Fed Bank carries $4 Trillion of that debt on its balance sheet which is leveraged 77-1 against the capital it holds to cover withdrawals and for which the assets are not marked to market prices. Then, there is also the massive $12 Trillion in consumer debt out there along with trillions more in unfunded pension obligations by governments and businesses and including Social Security and Medicare. Many businesses also owe money on loans.

A strong US dollar is deflationary or at least dis-inflationary at a time when the economy needs inflation to help pay down debt and service the payment obligations. This same strong dollar is also going to hurt US exporters, and I believe we will start to see and hear more stories about falling exports, which in turn will drive up unemployment if the domestic economy cannot pick up the slack.

We are already seeing this effect with the oil frackers in places like North Dakota, Pennsylvania and Texas which are suspending operations and laying off workers due to the low export price. In fact, the current low price of oil (about $53 a barrel for West Texas Intermediate) is below the cost of getting it out of the ground for many frackers. Moreover, many US oil producers are highly levered with junk bond loans which may start to fail.

This same strong dollar is also causing distortions in emerging markets and at least in Russia’s view, there is a financial warfare that is being implemented on that country (via economic sanctions and crashing oil prices). Could the collapse of the Russian ruble conceivably cause Russia to react in some sort of dangerous way either financially or through military efforts?

And in Saudi Arabia, the kingdom is said to be unhappy with US foreign policy since the Obama Administration has recently struck up relations with Saudi Arabia’s arch enemy, Iran. It is also reported in some circles that the 2011 Arab Spring uprising in Egypt is viewed by Saudi’s king as serious policy error by the US for our government’s unwillingness to support Mubarak, the former dictator of that country.  Thus, there is talk of the end of the Saudi-backed Petro-dollar scheme which has supported the dollar for the past 35 years as the price to pay for our government’s new alliances.

Even in the developed world, we see that Japan is going through a massive money printing scheme. Some quiet voices (outside the realm of the institutional sell-side cheerleaders on Wall Street)  talk of potential disaster for that economy as well as a massive spillover effect to the rest of the world should their experiment with massive quantitative easing fail to produce the results they seek, which is moderate inflation and increased exports.

At any rate, we need to keep one eye always on the dollar and another eye on how the markets will react to these developing, unstable situations should they persist. 2015 could prove to be a very interesting year, and one that doesn’t fit in with the pundits’ expectations of a higher stock market once again.