Dollar Headed Up?

Ambrose Evans-Pritchard has an interesting article in the Telegraph:

The US Federal Reserve has begun to pivot. Monetary tightening is coming sooner than the world expected, with sober implications for overheated bourses, and for those in Asia, eastern Europe and Latin America that drank deepest from the draught of dollar liquidity.

We can expect a blistering dollar rally, perhaps akin to the early 1980s or the mid-1990s. It is fortuitous that the BRICS quintet of Brazil, Russia, India, China and South Africa have just launched their $100bn monetary fund to defend each other's currencies. Some of them may need it.

America's unemployment rate has fallen from 7.5pc to 6.1pc in 12 months. The country has been adding 230,000 jobs a month in the first half of this year.

As I have pointed out before, as long as the dollar continues to be used as the world's reserve currency any kind of economic "collapse" seems unlikely. Yes, I know that many of us "hard money types" are predicting a collapse. They are wrong. The power of the state is huge, and all its power will be used. But this does not mean that the US is exempt from the normal business cycle. The effect of a normal cycle will be more pronounced this time, but no catastrophe. 

The stock market is an example of what I mean. The value of a company is ultimately determined by the profits it makes. That stream of income a company makes is then evaluated based on current interest rates. The lower the interest rates, the higher the evaluation of that income stream is. So since corporate profits are relatively high, and since interest rates are the lowest they have ever been in recorded history, the value of stocks will decline as interest rates rise (and they will rise, that is the whole point of Evans-Pritchard's article.) (Btw, the dollar going up means that inflation will go down.) 

As the Federal Reserve tightens, interest rates will rise, stocks and real estate will go down, and the dollar will strengthen. While I too could be underestimating the power of the state, I predict a quite rocky next few years with another serious crisis in 2017.