The drumbeat is relentless. Company after company, and industry after industry, have all pointed the finger at the rising U.S. dollar as a reason for any earnings shortfall, inventory problem, or other financial mishap. Just when you think you’ve heard it all, another economic segment steps forward and places the blame on the dollar, and now cheese has joined the chorus.
Today, a major story in the Wall Street Journal informs us that the U.S. dairy industry is suffering from a glut of cheese. Nearly 1.2 billion pounds of cheese now sits in commercial cold-storage units around the country. With a U.S. population of 323 million people, that works out to about 3.7 pounds of extra cheese per person. The stated reason for these extremely high stockpiles is that “the steady climb in the dollar has deterred major foreign buyers, causing supplies to back up in the U.S. just as production is surging to records.”
Sounds reasonable, but there is one significant problem—it is simply not true. I’m not talking about the inventory figures and the associated glut; I have no reason to doubt that. I’m referring the “steady climb in the dollar” narrative that permeates these discussions. The truth is the U.S. dollar peaked in value 14 months ago. Not only has it not been on a steady climb, it has not been on any climb at all. Instead, the U.S. dollar has been falling, and falling for more than a year.
The dollar did climb for about nine months in late 2014 and early 2015, but that is a very short period in the larger picture. Did the dollar’s valuation get all out of whack during its brief ascent? Not really. As measured by the PowerShares DB US Dollar Index Bullish ETF (UUP), the dollar’s value the past 18 months corresponds with its predominant valuation during late 2008, early 2009, and mid-2010.
This particular ETF represents the dollar’s value against a basket of six major world currencies. Its present exposures are the euro at 57.6%, Japanese yen 13.6%, British pound 11.9%, Canadian dollar 9.1%, Swedish krona 4.2%, and the Swiss franc 3.6%. Sure, the U.S. dollar has gained a little ground on the British pound and Canadian dollar during the past 14 months, but not nearly enough to overcome its losses against the yen and euro.
Except for companies using it as a convenient excuse, it is not clear what the motivation is for perpetuating the myth of a rising dollar. Somehow, much of the financial media has a strong enough belief in the fable to repeat it without checking or challenging the source. If you want proof, there is also a glut of currency-hedged ETFs on the market. These ETFs are designed to perform better than traditional international funds when the dollar is rising. Guess what? The U.S. dollar isn’t rising, and most of these currency-hedged ETFs are seriously lagging their unhedged counterparts.
The USDA says the food glut isn’t isolated to just cheese. Poultry, meat, and grains are also in this category. Farmers will be paid much less for their products this year. In theory, this should translate to lower prices for us at the grocery stores. However, the proverbial “middle man” knows the U.S. dollar is not on a steady climb and will be using this opportunity to increase the spread between farm and retail prices.
Energy retook the sector throne after relinquishing it to Real Estate a week ago. Oil prices continue to improve from their January lows, and they are bringing the entire Energy sector along for the ride. Materials also resumed its previous position of second place. Real Estate, which zoomed five places higher to the top a week ago, fell two places lower this week as much of its short-term surge evaporated. Utilities held steady in fourth, Telecom rose two spots to fifth, and Consumer Staples slipped to sixth. These changes put the four highest-yielding sectors together in the third through sixth positions. Among the lower-ranked categories, Industrials and Health Care both improved a spot, while Financials and Consumer Discretionary climbed. Technology remains the only sector in the red with a negative momentum reading.
Despite Monday’s strong rally, all of the style categories lost momentum for the week. The negative market action was enough to pull two categories into the red, as Micro-Cap and Small-Cap Growth are now in negative trends. The larger capitalization segments gained relative strength this past week, with Large-Cap Value and Mega-Cap climbing two spots and Large-Cap Growth improving by one. Two categories absorbed all of the relative strength losses, as Small-Cap Value dropped from second to fourth and Small-Cap Blend gave up three spots.
Latin America owned the top spot for 10 weeks but has now relinquished that honor to Canada. Latin America’s move off its lowest level since 2005 began in January and has been fraught with volatility. However, until the calendar rolled over to May, most of that volatility was biased to the upside, and all pullbacks were contained to just a few days. This does not signal the end of the run for Latin America, as it is still firmly in second place, and the recent pullback has been quite small in comparison to its prior advance. Canada has been patiently waiting for another opportunity to resume the leadership role, having resided in second place the entire time Latin America was on top. Additionally, Canada held the top position the four weeks before Latin America’s extended stay. The next four positions are occupied by the same categories as a week ago, although the U.S., Pacific ex-Japan, World Equity, and Japan all lost momentum for the week. The U.K. jumped ahead of EAFE, and both are barely clinging to their last traces of positive momentum. The Eurozone was not as fortunate—it fell two spots and slipped into a negative trend. Its fall puts three global categories in the red, with the Eurozone joining Emerging Markets and China in negative territory.
“ In all commodities, the pendulum swings hard in both directions. ”
—Justin Reiter, an Iowa corn and cattle farmer
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