Is the $USD Warning That Inflation is About to Become BAD News For Stocks?

By Graham Summers, MBA

Yesterday,
I outlined how the markets are likely at a very critical point regarding inflation.

By
quick way of review:

1)   
Stocks initially love inflation because it boosts results
(companies don’t report inflation-adjusted returns, so any increase in product
pricing due to inflation is instead reflected as “growth”).

2)   
This love relationship eventually turns to hatred as inflation leads to higher
operating costs, which squeeze profit margins.

In
yesterday’s article, I illustrated how this played out during the last major
bout of inflation in the 1970s. 

At that
time, stocks initially roared higher as inflation initially boosted corporate
results. However, by the time 1974 rolled around and inflation (as measured by
the consumer price index or CPI) hit 11%, stocks began to crash, eventually
losing ~50%.

I mention all of
this because it is highly likely that something similar is about to manifest in
the markets today.

Stocks have erupted higher on the back
of inflation, courtesy of $11 trillion in Fed QE/ fiscal stimulus from the
Federal Government between March 2020 and today.

However, inflation is now taking a turn
for the worse. And, as usual, the signs are showing up in the currency markets
first.

The Fed is in the
process of ending its QE program. Fed officials have also signaled that they
intend to raise rates three or four times this year. All of this should be
highly U.S. dollar positive.

And yet… the $USD
is breaking down.

The greenback has
taken out key support (green line in the chart below). Even worse, it’s also
broken its bull market trendline (blue line in the chart below).

This is a MAJOR signal
that the Fed’s actions are not enough. Put another way, the Fed is behind
the curve on inflation! This is extremely negative for stocks as it means inflation
is getting out of control (just like in 1974).

So, what would a similar, 1970s-style crisis look like today? The market is warning us, though few have noticed.

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Best Regards

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