The U.S. Dollar Is Losing Its Mojo

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In his podcast addressing the markets today, Louis Navellier offered the following commentary.

The big news this week will be the June retail sales report. The service economy is carrying the U.S. economy at the present time since the manufacturing sector is now at its lowest level in the past three years after contracting for sight consecutive months.

The U.S. Dollar’s Mojo

The U.S. dollar has lost its “mojo” in the past several months, despite the fact that the U.S. led other central banks in raising key interest rates. However, it is now perceived that the European Central Bank (ECB) will continue to raise key interest rates to 4% by September, while the Fed is nearing the end of its rate hikes. 

The Financial Times issued an opinion piece criticizing “American exceptionalism” and pointed out that a soaring budget deficit is making the U.S. one of the most fiscally irresponsible nations.  Specifically, FT pointed out that during the pandemic that the U.S. budget deficit tripled to more than 10% of GDP. 

FT is critical that the budget deficit is expected to average close to 6% of GDP in upcoming years, which is well above historical norms and 6 times the average of other developed nations.  In other words, if the U.S. tried to join the European Union (EU), its application would be rejected for fiscal irresponsibility.

Normally, a weak U.S. dollar fuels commodity inflation, but deflationary forces are still keeping some commodities in check. Citigroup, JP Morgan Chase and Morgan Stanley all cut their China growth forecasts this week. Officially, China has a 5% GDP growth target, but how it can possibly make that target when its exports and imports are declining is questionable. 

The Wall Street Journal reported that China’s economy only grew 0.8% (a 2.2% annual pace) in the second quarter and that more than 20% of Chinese between 16 to 24 years old are out of work.  Complicating matters further, Germany and the U.S. are systematically uncoupling for China, since it is no longer viewed as a reliable trading partner.  If China gets its “mojo” back, I expect commodity prices to firm up, but right now deflationary forces persist as China’s exports and imports struggle.

Decline In Wholesale Goods Costs

Interestingly, one of the reasons that wholesale goods costs declined 4.4% in the past year according to the June Producer Price Index (PPI), is that consumers are no longer buying as many goods, so imports from China, Japan, South Korea and Vietnam are all declining as The Wall Street Journal recently reported. 

Specifically, China’s exports plunged 12.4% in June, while imports declined 6.8%.  This is the biggest decline in exports in three years since after the start of the pandemic. China’s exports to the U.S. declined 24% in June, while its exports to the EU dropped 13%. 

Germany has followed the U.S. and is now openly encouraging businesses to look for alternatives from importing from China due to an increase in hostility. Interestingly, China just passed Japan in vehicle exports as Chinese EV exports soar to Europe and other markets.

Climate Concessions

The U.S. has dispatched John Kerry to China to attempt to restart climate negotiations.  After Nancy Pelosi’s visit to Taiwan, China cut off any climate talks.  Since China dominates the production of solar panels, lithium batteries and electric vehicles (EVs), it is profiting from the green agenda, even though it is not following it and still building coal-fired power plants. 

John Kerry’s main goal is apparently to convince China to transition away from coal for electricity generation. China has been a master of “kicking the can down the road to 2050 or later. So I suspect that China will agree to some concessions far in the future to preserve its worldwide dominance of solar panels, lithium batteries and EVs.

Nervous UAW

The United Auto Workers (UAW) are gearing up to go on strike in the upcoming weeks.  The timing is good for the UAW since auto manufacturing plants are often retooled in August, plus there is a growing glut of vehicles on dealer lots, especially EVs. The UAW wants to get rid of a tiered wage system and have equal pay for all its workers.

Furthermore, UAW President Shawn Fain said “Well, I think they’re doing layoffs under the guise of the EV transition.” Fain added that “It’s shameful to me, because as I’ve said before, these companies talk about transition to EVs and they talk about workers and call them family.  I don’t know how their family works, but my family doesn’t roll that way.”

Interestingly, the UAW has not endorsed President Biden for his re-election, since many UAW members expect to lose their jobs due to the transition to EVs, since EVs require far fewer components than vehicles with internal combustion engines. Obviously, this UAW dilemma may become a growing problem for President Biden, since he is a pro-union President. 

However, as Tesla (a non-union company) becomes more dominant, while Ford loses EV market share after slipping from #2 to #5 in the U.S. in EV sales in the past year, this falling market share is making many UAW workers very nervous. GM is now #3 in EV sales in the U.S. this year after Tesla and Hyundai/Kia, but GM will be shutting down its Bolt EV production at its Orion Assembly Plant in Michigan and start selling its Equinox EV that will be made in the San Luis Potosi in Mexico. 

Although the Orion Assembly Plant in Michigan will be retooled to start building the Chevy Silverado and GMC Sierra EVs, many UAW workers remain uneasy as the inventory of EVs continues to rise on dealer lots. The fact that EVs are not profitable for the Big 3, especially Ford, if EVs eventually succeed like President Biden wants, more EV manufacturing will likely be moved to Mexico to save costs and cost thousands of UAW jobs.

Russia announced this week that it is pulling out of the international agreement that allows Ukraine to export much of its Black Sea grain, which will raise concerns about global food supplies. Specifically, Russia said that it would rejoin this export agreement if Western nations allow Russia to export its own grain and fertilizers.

Russia also seized the operations of Carlsberg and Danone this week and is becoming increasingly hostile to the West.  I should add that Carlsberg has 8 breweries with 8,400 employees in Russia, while Danone is the largest dairy company in Russia.

The bridge linking Russia to the Crimean Peninsula was attacked again and Russia is blaming Ukrainian forces that used naval drones to attack the bridge. This bridge collapse will hinder Russia from supplying its troops in southern Ukraine. Previously a dam break in Ukraine also cut Crimea off from its freshwater source.  It is becoming harder for Russia to supply Crimea, so its residents are becoming restless.

Coffee Beans: Staring Contest

People in Hong Kong are urged to stare at smokers disapprovingly as part of efforts to create a tobacco-free city. HK’s health minister said someone who lit up in a restaurant would be unlikely to “hit back” if everyone stared at them. Source: Sky News. See the full story here.