Yesterday, the Dow Jones Industrial Average suffered its largest single-day point decline in history after tumbling 1,175 points. Compounding concerns, this sell-off occurred immediately after another large sell-off the previous trading day (Friday) where the Dow shed 666 points.
Although the forces behind these changes are, of course, complex, here are the cliff notes on what is driving this market correction.
As USA Today reported, “Fears of spiking inflation and borrowing costs caused investors to rethink their bullish views on stocks, which until just last week had fueled huge gains in the blue-chip Dow… [The market] fears and worries that interest rates could rise faster than expected.”
In my column last week, I discussed how rising inflation is a worrying trend for our economy. The recent Q4 GDP report saw the highest quarterly pickup in core inflation since 2011, and the dollar has fallen against gold and oil since President Trump took office.
This week, the market is sounding the inflation alarm as well. I believe the market is concerned about inflation for two reasons (the first one has been widely reported; the second, not so much):
1) Investors believe the Fed will reduce the supply of dollars (raise interest rates) faster than anyone had anticipated in order to stem the dollar’s decline.
2) Since Trump’s new Fed Chair Jerome Powell was sworn in yesterday (adding unpredictability), the market could be nervous he will stand pat and allow inflation to continue rising at its current pace. Markets may well be concerned that the Trump administration will continue to allow the dollar’s value to slide.
All of this underscores how tremendously important it is that the Trump administration now focus on maintaining a stable dollar. While Trump’s tax cuts and deregulation efforts give us much optimism for booming economic growth, as Steve Forbes noted, rising inflation will kill our improving economy:
Great nations do not have weak currencies. Nonetheless, with a surety born of ignorance, Treasury secretary Steven Mnuchin has bluntly stated his desire for a weak dollar.
Thankfully, President Trump immediately contradicted him. But the fact that Mnuchin and his department want to undermine the value of our currency is troubling. Mnuchin has bought into the alluring fallacy that trashing the greenback will help sell more of our stuff overseas, thereby strengthening the U.S. economy. Such false and toxic notions obviously mean the poor fellow has completely forgotten real-world experiences.
This is an incontrovertible fact: No country has ever devalued its way to greatness and enduring prosperity. Ever.
Ask Brazil, Argentina and Zimbabwe. Check out what happened to the Roman Empire when its Mnuchin equivalents undermined the empire’s currency.
Mnuchin needs to take a stroll down memory lane.
President George W. Bush’s Treasury chiefs thought that a slow-motion devaluation of the greenback would stimulate more growth. The weakening of the dollar–as it always does–triggered a fake housing and commodities boom, as markets flee to hard assets when money becomes unstable. We all know how that ended.
The sinking dollar has added unpredictability into the marketplace. Let’s hope the Trump administration will right the ship by charting a clear course forward to a stable dollar.