The Fed continues to bring the big guns, raising rates another 75 bp (0.75%) on July 27. Even though it stated the economy is softening, current inflation and CPI data suggest otherwise. The Fed may be forced into another 75~100-bp rate increase next month if the U.S. economy continues to show strong CPI and inflation trends. There is only one other time in recent history like the current market environment – 1998~2004.
The DOT COM bubble was unique in the sense that excess capital flowed into technology/internet companies hand over fist. It seemed all you had to do was register a URL, come up with some crazy business plan, and go talk to venture capital investors. It was not a crisis like the 2008-09 global financial crisis event. The DOT COM bubble was a process of unwinding/consolidating excess capital away from a euphoric speculative phase in the markets.
I believe the current pre- and post-COVID market rallies are, again, very similar to the DOT COM rally phase. Although this time, the focus is on foreign/global economies.
Fed May Have To Disrupt Global Currencies/Economies In Order To Tame U.S. Inflation
There are some similarities to the 1998~2004 DOT COM bubble scenario in the current U.S. markets. First is the rise in CPI and the huge increase in Inflation. CPI continued to rise throughout 1998~2008 – all through the DOC COM bubble disruption and up to the peak in 2007. The same type of thing is happening in CPI right now.
The reason why I believe the Fed will continue to aggressively raise rates is because U.S. inflation is red hot, and the past few rate increases have done little to disrupt U.S. economic trends. Yes, housing, retail sales and manufacturing are starting to see a shift in demand/activity. But the Fed is trapped in a very difficult situation where it must attempt to unwind the capital excesses throughout the world by adjusting rates and capacity here in the U.S.
That means the global markets will react to what the Fed is doing and attempt to chase opportunities in a stronger U.S. dollar until the Fed is able to break this cycle (see the change of direction in currencies near 2003 below).
The Big Bang Event For Global Currencies Should Be Less Than 12 Months Away
I’m not going to try to predict when global currencies/economies will relent to the extreme pressures inching forward by the Fed, inflation and other trends. But I will state that GBP and JPY are already at a combined lowest ratio level compared to the U.S. dollar over the past 25+ years. I can only imagine the intense economic/valuation pressures that are stressing many foreign global economies/currencies as the U.S. dollar continues to strengthen. Debts, liabilities, ongoing expenditures and essential services all need to continue for the people affected.
It may be just a matter of time before bigger cracks start to appear. We may see more uprisings and riots as we saw recently in Sri Lanka. We may see additional regional economic collapse events as at-risk nations strain to maintain its debts/liabilities. We’ll possibly see various aggressions ramp up as currency valuations get pushed toward the extremes.
Look at the U.S. dollar rally in 1998~99 on the chart (above). Even though the DOT COM bubble burst in 1999~2000 and the 9/11 terrorist attacks occurred in 2001, the U.S. dollar continue to strengthen until it broke down in late 2002 – nearly two years after the peak in the U.S. stock markets.
If the U.S. dollar were to rally above 110 and potentially peak above 115, that would represent an additional +7% rally in the dollar – and possibly represent another -10%~-15% collapse in JPY and GBP.
Let the currency wars begin. The Fed must continue to try to break U.S. Inflation. To do that, it may have to break multiple foreign currency capital functions and push global capital functions from one extreme (speculation) to another (contraction).