Why are market participants scared of a strong dollar? Because for years there was a massive carry trade against the US dollar, predicated on a bet that constantly printing currency and cutting rates would never create inflation. The world got used to betting on one thing -massive money supply growth- and the opposite -weak inflation-. Cheap money became expensive, as I explained in my book, Escape from The Central Bank Trap.

The US dollar is not strong. The loss of purchasing power of the greenback is the largest of the past three decades. The US dollar is only “strong” in relative terms against other currencies that are collapsing in a global currency debasement that comes after years of monetary excess.

The main issue in the economy is that there are two generations of market participants who have only witnessed expansionary policies. That is why the most pressing question for investors is not where earnings are headed or what the rate of change in economic growth is, but when central banks will pivot.

The Federal Reserve and other big central banks have caused a massive crisis. On the one hand, major central banks’ balance sheets have stayed intact in local currency in 2022, and the path of rate hikes is quite accommodating. Markets, on the other hand, are collapsing. How is this possible? Because central banks believe their actions carry no consequences as there is a legion of economists that twist facts to say there is no problem. However, the contrary is true. Markets and politicians are so accustomed to easy money that even the slightest normalization causes havoc around the world.

For the first time in decades, central banks are tightening their monetary policy while governments continue to spend money as if nothing has changed. Large enterprises are not harmed by the most recent rate increases as long as credit conditions are still lax. However, households and small enterprises are bearing the full weight of the financial squeeze.

The current level of mortgage rates in the US is the highest since 2008. According to Reuters, the average interest rate for a 30-year mortgage hit 6.02% last week.

Quantitative easing was designed as a tool to provide time for governments to implement structural reforms, boost growth and strengthen the economy. However, it has become a tool to increase the size of government and take increasingly riskier levels of debt.

The United States economy has not strengthened in the period of enormous fiscal and monetary stimuli, as the latest data shows. It needs increasing units of debt to generate a new unit of GDP, productivity is extremely poor and leading indicators are negative.