One reason why US stocks did so well in 2024 is that the US dollar strengthened.
https://x.com/Kanthan2030/status/1881311960257691778
The dollar is now the strongest it has been in the last 30 years. It is 20% overvalued, according to an IMF model.
www.poundsterlinglive.com/usd/21316-pound-to-dollar-rate-extreme-usd-valuation-seen-by-bank-of-america
The main reason for the overvaluation is the large fiscal deficits the US has been running in recent years.
www.ft.com/content/b66b4de0-44c8-441d-ac2f-9d94170c5c40
The deficits have strengthened the US economy, leading to higher interest rates and a stronger dollar.
The US budget deficit is far larger than that in the euro area and, at 6-7% GDP, it appears unsustainable in the long run.
www.apolloacademy.com/comparing-the-cyclically-adjusted-deficit-in-the-us-and-europe/
If the US has to rein in the deficit, that would lead to a weaker economy and a lower dollar. On the other hand, if the strategy to handle the rapidly increasing debt pile is to lower interest rates, that too would lead to a lower dollar.
These are medium-term considerations. It is not clear when the US deficit will become a serious issue for the markets. In the near term, it is possible the market could focus on Trumpโs tariffs instead, which could strengthen the dollar further. However, that would only make the dollarโs overvaluation worse and its eventual fall bigger, in my view.
Because my strategy is a value strategy, I try to avoid situations where much of the good news about an asset is already in the price. That may be the case for the dollar today.
www.newsweek.com/time-sell-dollar-morgan-stanley-1997782
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@triangulacapital +1.5%
SWDA.L +1.9%
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Sanofi was sold.
