“So, protectionism may do the exact opposite to what Trump expects. He thinks it is going to stimulate the US economy stimulate demand in the corporate sector and create jobs and opportunities, what it is likely to do is destroy corporate profits as the dollar screams higher.” Pal said.
And, should this happen and should the US then enter a recession, Pal still expects the dollar to remain strong because, while the US may be weaker, the rest of the world remains in an even more parlous state and, as he pointed out, it is the relative differential between counties, between interest rates that drives currencies, rather than the absolute level.
“We are getting into a perfect storm, where probabilities are wildly on our side that almost whatever the economic outcome, the dollar goes higher and that the pullbacks aren’t that long,” Pal said.
Investment implications
For Pal the two key trades from this thesis are to buy the dollar and also to hit pause on one’s emerging market buying intentions.
What the two previous dollar bull markets had in common was that emerging markets were significantly hit by this dollar strength and, with at least a third of the dollar debt in the hands of emerging markets, it is highly possible that they will be hit again.
“I think that the emerging markets are due a crisis. The probability is that it this bull move is not over until those positions are paid off or are defaulted on.” But, he added once that has happened, emerging markets will be the place to be.
