by Ivan Martchev

November 3, 2020

The Brazilian real closed at 5.75 against the U.S. dollar last week, just 0.25 below its all-time low. (A weaker real appears as a rising line in this chart, since it is an inverted ratio of Brazilian reals per dollar.)

Brazilian Real versus Turkish Lira Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

With daily Covid cases rising, there is no sign of this pandemic easing up. In this environment, the dollar should move higher, particularly against emerging market currencies as this pandemic has the effect of massive quantitative tightening on the global economy, as it weakens the cash flows that service record dollar debts of foreign government and corporate entities, which reached $12.1 trillion at the end of 2019.

Brazil is in relatively good shape, but places like Turkey and Argentina, which have had a chronic inflation problem, with insufficient forex reserves and too much dollar borrowing, have seen their currencies fare significantly worse than Brazil. It is entirely possible that this pandemic could cause another emerging markets crisis, similar to the Asian Crisis in 1998, but this time the crisis could be more global in nature – not necessarily centered in Asia, where the pandemic has been handled better.

Covid Tracking Project Cases and Deaths Charts

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Federal Reserve, and any central bank for that matter, does not want to see a U.S. dollar spike, as the effect of this pandemic is highly deflationary, so they are doing what they can to create inflation. I think this inflation will likely come as the economy starts to normalize after this second COVID wave is over, but likely not before then. There is currently too much slack in the U.S. and global economy.

United States Dollar versus United States Central Bank Balance Sheet Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It has been a colossal mistake to look for the dollar to decline because of more Fed Quantitative Easing (QE). Since the Fed started to do QE in late 2008, the dollar is up quite a bit on the old U.S. Dollar Index (see chart above), but on the newer Broad Trade-Weighted Dollar Index, it went to an all-time high in March, higher than the prior 2001 high. So, to paraphrase Mark Twain, news of the demise of the U.S. dollar has been greatly exaggerated for decades – and it has not been QE of late to push it lower. Rather, more COVID daily records means we’ll likely see more shutdowns and a stronger dollar.

Trade Weighted United States Dollar Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Stock Market Is Stronger than Most Forecasters Predicted

On March 30, a prospective client asked me for a target for the U.S. stock market by the end of 2020. At the time, the market had been bombed out. Many investors were shell-shocked, looking for reassurance.

The S&P 500 had just bottomed out at 2,191 the previous Monday, March 23, but it had bounced back in the previous week. I said my best guess was that the S&P would recover to “3000 to 3100 by Election Day.”  Well, the index decided to prove me wrong by shooting up to just shy of 3600 on September 2.

The stock market overshot because of record deficit spending and much faster Fed intervention than in 2008. Yes, I believe the Fed is supporting the stock market in a major way. Ironically, because of a fear of a Democratic landslide victory, stocks have weakened and may see 3,100 during the election week.

I was not making election forecasts when I set this target in March. I simply thought that with low interest rates, pension funds were likely to sell bonds and buy more stocks. The Fed provided them with financial ammunition by buying up much riskier bonds than it did in 2008, in addition to Treasuries and mortgages.

I concede that a Democratic landslide and an election outcome that is not decided within 24 hours will likely pressure the stock market until the results are clear, but whatever the outcome, the Fed is not on the ballot and they will keep supporting the market and the economy. And even if the Democrats win it all, deficit spending will stay with us until this pandemic is over; so if the market does sell off this week, I think it will rebound rather swiftly upon the resolution of any election outcome uncertainty.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The U.S. Dollar Is Getting Ready to Move Up

Sector Spotlight by Jason Bodner
Big Money Provides Ballast During Market Storms

View Full Archive
Read Past Issues Here

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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