CBS Marketwatch Story: "How the 'almighty' dollar will tell you where stocks are going next"

Image of the USD chart showing a parabolic rise
October 27, 2016 by Matt McCracken

Should it bother us that the adjective "almighty" is used to describe the US dollar.  In America, is the dollar really more almighty than the actual Almighty?  

Here is an article just posted by the "omniscient" financial media explaining just how almighty the almighty dollar (USD) really is...

In some respects, I couldn't agree more with the article.  Everything that goes on in the capital markets is underpinned by the strength of the dollar.  In today's world, every currency of note is FIAT meaning "faith-based".  No hard asset such as gold or silver backs any currency.  But with the USD, there is a caveat. The USD is the only currency that is supported by the price of oil so in an indirect way, the USD is backed by oil - a real physcial asset.  No other currency is tied to oil the way the USD is so there is a legitimate reason why the USD stands above the crowd.

But what if that relationship changes?  What if large oil producing nations decide that they already have enough USDs?  And in their minds, the USD isn't so almighty?

What are the chances of a sea-change such as this taking place?  And what does it mean to the USD and the US stock and bond markets?  And most importantly, what does it mean to your financial situation?  If we think this is a real possibility, how can we hedge it?

I have no idea if Saudi will eventually default on the Petrodollar hedgemony arrangement or if some other oil producer(s) is powerful enough to marginalize this unholy relationship.   But in the short-term, the USD looks terribly overbought.  It has been appreciating along a parabolic curve which is typically a sign that a reversal is afoot.  But that reversal could come at much higher levels.  My belief is that once this curve is busted, the USD should decline and may do so in a meaningful way.  

Over the past several years, there have been numerous global-macro events that have been USD supportive.  The BREXIT was the most recent but before it, there was the advent of Abenomics, the terrible Fukushima disaster and the never-ending saga of the southern European debt crisis - all USD supportive.  And everything that supports the USD gives more fuel to the FED.  And the FED uses this fuel to prop the US stock and bond market.  I am shocked and amazed that given everything that has taken place, the USD is not much, much higher.  It has barely retraced 50% of the decline it experienced between 2000 and 2008.

My investment thesis is that if anything compromises the strength of the USD in a meaningful way, it will hamstring the FED and in turn will bring down the US stock and bond markets with a mighty blow.  I am not a soothsayer so I can't say it will happen and I certainly cannot say when or how it will happen, I just know it will be bad if it does happen.  

The most obvious hedge for a falling USD is commodities.  Gold and silver will most likely being the be the primary beneficiary or perhaps oil will benefit the most.