MSM picks up on the downfall of US dollar
Both CNN and Fox News recently ran stories covering the potential downfall of the US dollar (USD) as the global reserve currency. Sounding a somber and urgent tone, the two networks, on opposite sides of the political aisle, ran stories covering the recent talks between Russia and China using the Yuan for trade. A topic of conversation in the fringes of financial circles, it was curious to see two of the largest networks in the US running with this story.
- We have written about the risk to the USD before
- Since WWII, the US has been the leading global superpower of the world
- The USD is the currency in which most commodities are traded
- Given the global nature of most commodities, this also means much of the world uses USD
- The current geopolitical climate, defined by a tension between the West and East, provides for an opportunity for our adversaries to try and seek other arrangements
- Any such transitions would take years and likely decades
- We found the MSM picking up this story curious
Return of the FANG
Since December of 2022, the rally in stocks has been led by a handful of the largest technology companies. While the S&P 500 has logged an impressive ~7% year-to-date (YTD) return to close Q1 of 2023, the vast majority of the return is explained by a small handful of large technology companies. This means that 98% of the stocks in the index are flat YTD, which is not a sign of a healthy market. This is the same dynamic that carried the market to all-time highs in 2021. This also comes at a time when Apple and Microsoft represent over 13% of the S&P 500, an all-time high.
- When discussing the stock market, most point to a broad measure like the S&P 500
- Today, just 2 stocks, Apple and Microsoft, represent over 13% of the index while only being 0.4% of the 500 companies
- This has presented itself in the recent performance of the S&P 500 being dominated by a handful of large technology stocks
- This means that most stocks are actually not up on the year
- This is not a healthy dynamic and may mean future gains are limited
Fed funds above inflation
For the first time since COVID began, the Federal Funds rate, or the interest rate that serves as the guide for all rates, is above Core PCE (inflation). This is important because in no instance of inflation before has it been able to come down until the Federal Funds rate was above the inflation rate. It could be yet another signal that the Federal Reserve is close to finishing its interest rate hiking cycle.
- Inflation has been coming down as the Federal Reserve has been raising interest rates
- For the first time since COVID began, the level of interest rates is above the level of inflation
- The effective Fed Funds rate is now 4.83%, and PCE is at 4.6%
- Historically, you needed to see this for inflation to come down
- Which may mean the Federal Reserve is done or close to done with hiking rates