Watch the Dollar

Signal or Noise Quarterly Newsletter | Q2 2016

At this midway point in the year, we’ve been reflecting on 2016 and trying to make sense of what’s happened to determine our outlook going forward. What we’ve found is that it’s a lot easier to identify what hasn’t made sense this year.

With all the incongruities we’ve seen in markets since the February lows—where the price of oil rises while supply and demand remain divergent, where currencies rise in countries where the economy weakens, and so on—it’s no wonder that many investors have had a hard time believing the rally that followed.

That skepticism is warranted; operating in an environment where markets move in ways completely contradictory to fundamentals, it seems almost futile to attempt any kind of forecast, let alone make any high conviction calls. However, it’s even less productive to just throw up your hands when nothing makes sense and wait for things to normalize. (Those who went to cash in early 2009 understand this lesson well.)

Our strategy in this environment is to identify a signal we do trust and then watch it closely to determine our outlook. For us, that signal right now is the dollar, and we are looking at its movement as an indication of how risk assets will perform in the second half of the year…

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