It's been a couple of months since I've written about US Dollar inflation here and here. I thought I'd write a short update with some charts to show how the dollar is doing. You'd be excused if you expect the dollar to be 10% lower than the beginning of the year, since inflationists are the most prominent in the bitcoin and sound money space.
The dollar is obviously crashing versus bitcoin, but bitcoin is a very unique uncorrelated phenomenon that doesn't give us a broad picture of the economy, yet.
The gold standard for inflation expectations is the 5Y/5Y Forward rate. The Fred database tracks this. As you can see below, this critical rate has been increasing from a very low level last year and topped 2% for a short period, but since has dropped back below.
Surprise surprise! The peak in February 2021 at 2.14% is still substantially below the 2018 peak of 2.35% and the 2017 peak of 2.23%.
Wait what? Yes, inflation expectations in 2021, after the absolutely massive easing and spending by the Fed and US Government, is still below the non-inflationary years just prior!!
Trade-weighted Dollar Index
How about the dollar versus other currencies? I wrote about all the ways that the dollar is measured against other fiat currencies here.
The trade-weighted dollar index is the broadest measure of the dollar we have. And how's that going?
After the initial spike in 2020, the dollar dropped versus other currencies, but has held the bottom since the beginning of the year. I mentioned several times on my podcasts that a bottoming in the dollar appears to happen over a couple months, and so far, this bottom is looking very similar to the 2018.
And where is the trade-weighted dollar relative to its 2018 bottom, where the Fed was tightening? It's still above it. Where's the inflation?
I'm including the monthly chart for the DXY to show what a real drop in the dollar looks like. That peak on the left is the dotcom bubble and 911. It took 3 years to drop from 120 to 70!
Can you imagine? The inflationist propaganda we've lived through this year was for a drop from 100 to 90. The shift in purchasing power during that earlier era had to have been incredible.
The bottom in 2008 was the Great Financial Crisis (GFC) when the Fed started QE. Most recently, in comparison during GFC2 the dollar drop looks pathetic. It didn't even get back to the 2018 low. This bottoming pattern is also shaping up just like 2018.
How about commodities? We are also being bombarded by calls for a secular bull market in commodities. However, to get that secular bull market we need actual growth!! Today, we have rising prices due to production cuts and temporary stimulus. This is not how you get a sustained bull market.
I might get some push back from people saying things like, "you are measuring the dollar versus other fiat currencies that are inflating faster." Well, in addition to commodities we can look to gold, which is not signaling inflation either.
My position on gold has not changed. Gold is still below its 2011 high and is struggling versus the dollar. I still expect the first 6 months of 2021 to be quite bearish for the yellow metal, after which time it will likely rally.
If this support level in gold fails, I expect a further $100-200 slide in the price. The dollar is even strengthening versus gold!
I'm in the market for an patio grill. I haven't owned one in about a decade so have no idea what I'm looking for. My brother-in-law is very happy with his grill and uses it at least twice a week, so I asked him for his opinion of the specific one I picked out online.
He said it is the exact model grill he has, that he bought 8 years ago. And the kicker is he paid $50 more back then. So prices are down on grills by roughly 5-10% over 8 years. It's not a perfect example, but lots of commodities go into a grill: aluminum, ceramic, glass, other metals of all sorts, plastic, etc.
We still aren't seeing inflation in any significant way. What we are seeing is a reflexive bounce after a deflationary shock that destroyed production paired with a temporary effect of temporary fiscal stimulus.
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