Quotable
“There are designations, like ‘economist,’ ‘prostitute,’ or ‘consultant,’ for which additional characterization doesn’t add information.”
–Nassim Taleb
Commentary & Analysis
Dotty confusi-nomics and the dollar.
I watched America’s lead economist—Fed Chairman Janet Yellen—talking about the economy yesterday; and after she was done I was more confused than when she started—but was happy with the outcome as our subscribers and I were long the British pound.
This is what I heard from Chair Yellen: The US economy is doing well; but not that well. Inflation isn’t a concern, but we should be concerned as its ticking higher. Global economic turbulence is dragging down our dots, but a strong US labor market should allow us to hike soon.
So, the dotty takeaway—two hikes instead of four.
So, the US Federal Reserve Bank will only hike twice during 2016. This compares with an expectation of zero hikes, and possibly more cuts, from both the Bank of Japan and the European Central Bank this year. It means the US dollar yield premium is likely to rise sharply against the yen and euro as the year progresses. Knowing that, what should one do? Well, the answer is obvious: Sell the living bejesus out of the dollar, of course.
The dollar was creamed on the news. And continues to get hammered one day after Janet’s lesson in confusi-nomics…but is this an opportunity for those who believe the real economy matters? Maybe so!
There a simple framework I keep in mind when watching the news and thinking about the currency market. It is called The Dollar Smile. I first saw this in a research note writing by Stephen Jen, when he was with Morgan Stanley—a firm that does great currency research IMHO. The Dollar Smile looks like this:
