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Next Dose of Inflation

John Lekas – CEO and Senior Portfolio Manager 

July 24th, 2023 

We anticipate that weakness in the US dollar (DXY) will initiate an upward trajectory in commodity prices. The sanctions against Russia have led to fragmented financial markets, allowing movement away from the dollar towards other currencies for the purpose of trading commodities; currencies such as the Chinese renminbi, the Indian rupee, the ruble, and the euro.  As a result, foreigners have been selling dollars as they are not needed for all their raw material purchases, and owning dollars has been proven to be a losing proposition. For the Federal Reserve to have raised 6 times since September 2022 and have the dollar down 12% is indicative of a currency that wants to go lower; the dollar should’ve rallied on the interest rate hikes.

US Dollar Index Spot Rate

Currently, the US treasury debt is at $32 trillion (±), and interest payments on this debt have gone from $160 billion annually to approximately $1.4 trillion annually on a go-forward basis. Total tax revenues for 2023 are estimated at around $2.4 trillion, and military spending is at approximately $800 billion; there remains limited funding for other essential services. Our projection suggests that the total debt will escalate by an additional $2 trillion, reaching approximately $34 trillion in 2024, further diluting the dollar. We are now in a position where the United States cannot pay the money back. Traditionally, this dilemma is tackled by devaluing the currency and settling debts with depreciated dollars. If the Federal Reserve lowers rates, the dollar could go into a free fall, rattling markets and driving food and energy to much higher levels. Apples at $6.00 per pound and gasoline at $7.00 per gallon is a real possibility. It is likely that the Federal Reserve will persist in raising interest rates, despite the relatively low impact thus far. Furthermore, as the economy continues to thrive and the risk of a recession diminishes, the yield curve should begin to normalize.

US Treasury Curve Prediction

In this scenario, extending maturities may prove to be painful. We believe it is prudent to adopt a risk/reward approach by maintaining shorter maturities. We expect the Federal Reserve will raise rates by another 0.25 at the forthcoming meeting on 7-26-23 and come with additional hawkish comments.

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