The dollar cycle is heading down?

I don’t believe there is an inherent reason for a dollar cycle. The evidence, at least from the chart, suggests a pattern in the dollar’s behavior. No, there may be movement away from extremes, a form of mean reversion, such that if the value of the dollar gets high, policy, trade, and capital flows will reverse and cause a change in trend. We should see this more clearly through a valuation model or with the dollar’s real value. Of course, extremes in the dollar will also be affected by the behavior of other countries, since an exchange rate is a relative price. But for now, let’s take the chart at face value, which suggests the dollar has been on a ten-year strengthening run that is reversing. This change started in 2024 and looks to continue. From a policy perspective, high inflation in the US relative to many other countries suggests a decline that will continue until the Fed can get back to its 2% target and show it is committed to taming inflation. Second, the declining dollar is linked to falling Treasury safety, which will require better control of the US federal deficit. 

The dollar has no inherent cycle. However, policy behavior may follow a cycle.

Idiosyncratic risk is dominating the equity markets

The intra-stock correlation is at market extremes. Dispersion measures are also high, suggesting very little common movement across stocks. Put differently, idiosyncratic risk is high. This means that we should be in a stock picker’s dream. Investors who can see distinct differences in individual stocks will be rewarded, while those focused on common behavior will be disadvantaged. However, the ability to make money in this environment is not a given. Just because stocks do not move together does not mean the stock-picker can identify winners. It does not mean stock betas will go to zero, but it does mean alpha should be more dispersed and residuals from any market regression should be higher. The equal-weighted index has outperformed the cap-weighted SPX index for the year and over the last 3 months.

The refined oil product market is global

The big issue in US energy markets is the high price of diesel fuel, which raises shipping costs. The diesel-gasoline spread in NY Harbor is at a high for the year. Some of this is seasonal. More gasoline is refined during the summer driving season, but the US is a net exporter of diesel, and this has increased with shortages in Europe. What some will think is a local market for a product is actually a global market.

Regardless of crude price, there is no simple switch that can increase diesel fuel without changing the quantity of other products. If firms are allowed to export, the product will move to the location with the greatest demand; so if Russian refined product cannot reach Europe and Arab refining is limited because of the Strait of Hormuz closure, the product will come from the US and affect local prices. 

Partial knowledge versus full knowledge and storytelling

Partial knowledge is more often victorious than full knowledge; it conceives things simpler than they are and therefore makes its opinion easier to grasp and more persuasive. - Nietzsche 

Information overload exists. We don't want too much information because it gets in the way of the facts needed for a good story. Hence, there is an optimal amount of information: discard facts that aren't needed to tell a coherent story; yet if we have too few facts, we may miss what's critical. 

Good decisions always start with: Do I have the right information? Do I have enough information? What will I do with the extra information? Am I being too simplistic? Am I making the problem too complex?