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February 06, 2018 at 07:25 AM
What’s up with the markets?
Flash back 30 years to October 1987, when Treasury Secretary James Baker spoke about devaluing the dollar over the weekend before the market crash.
“There’s no question in my mind that Treasury Secretary [Steven] Mnuchin did the same thing” by talking down the value of the greenback in late January, said Richard Bove, a bank analyst with Vertical Group, in an interview with ThinkAdvisor on Monday, after the Dow Jones industrial average took a record 1,175-point dive.
The average made several positive and negative swings Tuesday and was down 55 points in afternoon trading.
The weaker dollar makes it less appealing for foreigners to buy U.S. debt, just as the need to sell more debt is on the rise due to fiscal policies such as higher spending and lower taxes.
“Don’t get caught up in [looking at] the results rather than the cause,” Bove said. “The question is who is going to buy our debt?”
It’s a hard sell when foreigners are poised to lose money as the dollar declines and the value of their Treasury holdings drops, he adds.
(The U.S. dollar currency index was down about 2% this year as of Feb. 8; it fell 3.3% in January, after declining close to 10% in 2017.)
“Mnuchin doesn’t get it,” Bove said. “His main job is to find the money to pay for the debt … and the product to do that is based on the dollar. What are you doing talking down the dollar?”
Such talk puts the entire financial structure at risk, since a pullback in foreign purchases means that the U.S. government may need to raise taxes or curtail spending — all at a time when interest rates need to be moving “meaningfully higher,” he said. “The market is coming to grips with that.”
His outlook is shared by other veteran market-watchers, like Joseph G. Carson, the former global director of economic research at AllianceBernstein.
“Two radical policy experiments are colliding, as unconventional monetary policy accommodation that led to near zero official interest rates and record purchases of debt securities is reversed at the same time as a bold and risky fiscal spending plan is being enacted,” Carson explained in a Bloomberg commentary.
“The net effect should be a major shift in liquidity flows with more money being directed and used in the economy, leaving less liquidity — in the form of higher interest rates and less new flows — for the financial markets,” he added.
