Do you feel 20% richer than you did 18 months ago?
You might not feel richer, but the dollars in your bank account are worth about 20% more than they were in mid-2014.
When the dollar (or any currency) fluctuates in value, it’s usually not very obvious. Most of the time, the best place to see movement in the value of a currency is in the U.S. dollar index. It plots the exchange rate between the U.S. dollar and a basket of six other major world currencies – the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc.
Normally, these fluctuations are imperceptible outside of the index itself. But lately, a variety of factors have caused some very significant and noticeable trends in the broader market.
One of the biggest trends has been low oil prices.
Now, it’s true that global oil supplies have been rising. According to the U.S. Energy Information Administration (EIA), the supply of oil is nearing an all-time high set back in 1983.
It’s also true that demand has been relatively flat. It’s only up about 1% from last year’s demand levels, according to projections from the International Energy Agency (IEA).
Usually people only look to supply and demand as the main inputs to price changes – but the dollar is a huge factor.
For one, oil is priced only in dollars in global markets. You’ve probably heard of the petrodollar. Producers and consumers have so far agreed to settle oil market contracts in dollars and dollars alone.
That means if China, Russia or Brazil wants to buy oil from global markets, they need to buy dollars with renminbi, rubles or reals first.
So the price of oil is especially sensitive to dollar value fluctuations, because it’s on the flip side of every oil transaction.
So how can we know if low oil prices are due to supply and demand dynamics, or if there’s something going on with the actual value of the dollar?
You might be surprised to see the chart below from the St. Louis branch of the Federal Reserve. It plots the percentage change of oil in red, and the percentage change of total U.S. dollar reserves in blue.
You’ve probably heard that since 2009 the Federal Reserve has pursued a variety of stimulative policies and has essentially flooded the market with easy access to dollars. First there were TARP bailout funds in 2008, which capitalized financial firms on the brink of insolvency. Then there were successive rounds of “quantitative easing,” or QE, which ended in 2014.
You’ll notice from the chart above that I’ve marked where each round of QE stimulus ended. It’s clear how the end of those policies affected both the dollar reserves and the price performance of oil.
In other words: less stimulative policies means dollar strength, which means weaker oil prices.
This trend has only accelerated since the Fed raised interest rates by 0.25% in late 2015. Oil is near record lows. The dollar is roaring higher.
So, how can you benefit as an investor?
30% Off Your Next Vacation to Canada
Besides being a great time to travel abroad (the dollar is near record highs against the Canadian dollar, the euro and the British pound), there are some exciting investment opportunities.
It might seem strange to think about dollars as an investment (especially while interest rates are near all-time lows) but there’s no question the dollar is in a strong, 18-month-plus bull market.
The last big bull market in the U.S. dollar lasted seven years – from 1995 to 2002. And while I’m not calling a top in the dollar or a bottom in stocks, I’ve been working closely with Ian Wyatt, our chief investment strategist, to uncover an investment that plays on the strength of the dollar.
We’ve found something very intriguing. It’s a way to have put dollars to work in an investment with a bear market crisis investor who has a long track record of success.
It’s part of a project I’ve been working on called “The Must Own Asset of 2016” – and I’m not giving away the whole story by telling you this asset is the dollar.
But if you’re interested in why we think the dollar will continue to outperform – and the unique investment we’re using to take advantage of the dollar’s rise – I think you’ll enjoy this research.
Note from Ian: Kevin and I have been working on this dollar investment thesis since late 2015 – and while I think this latest correction is a much-needed break for the market, I have already put some of my own money into this unique dollar investment. I sent out a full report to my subscribers all about it last Friday. Click here to see what we found…