Today's release of the December consumer price index showed a monthly gain that didn't seem like much, but it is quite significant from a big picture perspective. The 0.3% jump brought the year-on-year change up to 2.1% from the 1.7% that it had hit the month before. Since September of 2015, the U.S. CPI inflation rate has jumped by over 200 basis points. In the meantime, the U.S. Federal Reserve has raised the Fed Funds target rate two times by one quarter point each time -- in other words, inflation has risen four times more than interest rates. Inflation-adjusted rates have actually fallen by over 150 basis points!
MRP has long argued that, while changes in the nominal interest rates of one country compared to another tend to get all the media attention as it pertains to exchange rates, it is the inflation-adjusted short-term rates that matters. For that reason, we have had the non-consensus view that the U.S. dollar, rather than strengthening further in the year ahead, is likely to weaken. According to a Bank of America survey, "Long the U.S. dollar" is by far the most crowded trade in money management.
The plunge in real rates will only get worse as the year-over-year percent jump in energy prices filters through the numbers in January and February. What analysts would call easy comparisons if they were looking at a company's earnings will be a huge factor in boosting CPI numbers even further; in the absence of an unexpected extra tightening by the Fed, real rates will only drop further into negative territory. As a result, the dollar is likely to come under additional pressure.
A falling dollar would reinforce our bullish position on gold and gold miners. It won't hurt oil stocks either. However, it is likely to be an additional negative for the long-duration segment of the fixed income markets.