What is your belief about trading price of EUR/USD in the following months? Given the enormous stimulus that the FED induced in the economy respectively to the ECB one, considering the current inflation rate at 5% in US and 2 something % in EU, my immediate conclusions is that we should expect an ulterior devaluation of US dollar. However, in your article you mentioned that this is a relative game and many countries or institutions are doing the same.
Thank you very much, your articles are very interesting and thoughtful.
I agree completely--dollar is tied to risk/volatility more than those other macro variables like trade deficit--although there is some link to relative growth and relative equity flow
Agree the "USD is being devalued" arguments are usually pretty shoddy. But i have two big caveats:
1) 30y real yields are currently -20bp. So someone who retires on a fixed income or with a fixed amount of savings and who (wisely) invests in safe assets is expected to gradually lose purchasing power over the course of their remaining years. This doesn't feel quite right.
2) The ratio of wealth:gdp is at a record high. Does anyone actually believe that wealth could actually be converted into goods & services at anything resembling the current price level? I doubt it. Mostly we're hoping the "velocity of wealth" never increases. If it does, we will have some difficult choices to make and the purchasing power of the USD could easily be the victim.
Interesting analysis, but something does not make much sense. The "average" American does not actually exist. Income distribution is heavily skewed and it would be better to show who won and who lost in the last 14y by income brackets. Would love to see such an update. Thanks!
Hi Alf, thank you as always. However, I have a critique:
It is not fair to make an assumption based on *averaged wages*. If you look into that wages you can find a disparity where *most* people's salaries didn't increased at the same rate than the *some* people's salaries.
Your analysis of real incomes assumes that inflation is measured accurately. There are many observers that say inflation is under reported. It appears that for sections of society, inflation is indeed higher than the averages. These people would therefore not have experienced real wages growth.
When you say "So, if European governments are trying to push EUR real yields down more aggressively than US is doing, EUR/USD falls. And vice versa.", is it correct? I would think EUR/USD increases and, actually, I think it is what the graph of yield differentials indicates.
In a different note, how do you model EU as an asset? I see that you estimate differences between 10Y USGOV and 10Y EU, but the EU does not issue debt as an entity. Its members do. How are you estimating that in the graph?
Lets say I have constructured a portfolio against long term USD devaluation based around hard assets: gold, other commodities, real estate, and even emerging markets.
Now, lets say that I wanted to dedicated a 5% of that portfolio to hedge risk in case the USD devaluation thesis proves wrong over the following years. I am thinking, for example, in buying long term call options on something representing (or benefiting from) USD strenght/appreciation.
What do you reckon would be the ideal hedge asset to buy those calls for?
What is your belief about trading price of EUR/USD in the following months? Given the enormous stimulus that the FED induced in the economy respectively to the ECB one, considering the current inflation rate at 5% in US and 2 something % in EU, my immediate conclusions is that we should expect an ulterior devaluation of US dollar. However, in your article you mentioned that this is a relative game and many countries or institutions are doing the same.
Thank you very much, your articles are very interesting and thoughtful.
Matteo Ticli
By measuring USD purchasing power against metals - e.g. gold - aren't we assuming that gold purchasing power - so not price - is constant over time?
I agree completely--dollar is tied to risk/volatility more than those other macro variables like trade deficit--although there is some link to relative growth and relative equity flow
Agree the "USD is being devalued" arguments are usually pretty shoddy. But i have two big caveats:
1) 30y real yields are currently -20bp. So someone who retires on a fixed income or with a fixed amount of savings and who (wisely) invests in safe assets is expected to gradually lose purchasing power over the course of their remaining years. This doesn't feel quite right.
2) The ratio of wealth:gdp is at a record high. Does anyone actually believe that wealth could actually be converted into goods & services at anything resembling the current price level? I doubt it. Mostly we're hoping the "velocity of wealth" never increases. If it does, we will have some difficult choices to make and the purchasing power of the USD could easily be the victim.
Interesting analysis, but something does not make much sense. The "average" American does not actually exist. Income distribution is heavily skewed and it would be better to show who won and who lost in the last 14y by income brackets. Would love to see such an update. Thanks!
Hi Alf, thank you as always. However, I have a critique:
It is not fair to make an assumption based on *averaged wages*. If you look into that wages you can find a disparity where *most* people's salaries didn't increased at the same rate than the *some* people's salaries.
Kr, Josep.
Your analysis of real incomes assumes that inflation is measured accurately. There are many observers that say inflation is under reported. It appears that for sections of society, inflation is indeed higher than the averages. These people would therefore not have experienced real wages growth.
Hi Alfonso,
When you say "So, if European governments are trying to push EUR real yields down more aggressively than US is doing, EUR/USD falls. And vice versa.", is it correct? I would think EUR/USD increases and, actually, I think it is what the graph of yield differentials indicates.
In a different note, how do you model EU as an asset? I see that you estimate differences between 10Y USGOV and 10Y EU, but the EU does not issue debt as an entity. Its members do. How are you estimating that in the graph?
Thank you very much.
Best regards
Javier
Hi Alfonso, which currencies do you see outperforming the dollar longer term?
Hello Alfonso!
Lets say I have constructured a portfolio against long term USD devaluation based around hard assets: gold, other commodities, real estate, and even emerging markets.
Now, lets say that I wanted to dedicated a 5% of that portfolio to hedge risk in case the USD devaluation thesis proves wrong over the following years. I am thinking, for example, in buying long term call options on something representing (or benefiting from) USD strenght/appreciation.
What do you reckon would be the ideal hedge asset to buy those calls for?
Thanks!