Dollar Dysfunction

US equities discounted the rancor on Capitol Hill and closed positive on Friday. This put the totals for the year up +5% on average across the major indexes.  The Dow led the pack, up +1.93 % this week.

Equities seemed to love the prospect of a shutdown. On a positive note, should the shutdown last long enough, it might end up paying for the increased deficits that were just ushered in with the new tax bill.

Maybe our current governmental dysfunction is so damaging this shutdown is an improvement.

After the markets closed on Friday, we spoke to a dear friend, a successful hedge fund manager whose lives in Paris and he gave us his view of what the current perception is of the US in Europe.

His insight isn’t pretty. The French and most of Europe used to think the US was the leader of the free world and a nice place to visit but now it’s neither a place to visit or a nation to be taken seriously. Lending us Layfette and some cash a few hundred years ago is now an experiment gone bad.

On a more tangible note, this view has ramifications that are playing out in the financial markets. Retreating from leadership of the world stage has blowback. However, the impact is being masked by a strong equities market. So, while it is true that US equities are hot, it’s riding a tailwind of a strengthening global economy.

Emerging markets, predictably China and even Japan are outperforming the US since the US presidential election.

The worst casualty is the dollar. It’s very weak, attacking long-term support despite rising rates. The Chinese Yuan and the Euro have moved almost 15% against the dollar since the election, so the move up in US equites is not impressive in absolute relative terms.

On a positive note, semiconductor recovered from its recent swoon and made new highs, while retail (XRT) is now the leading market sector with homebuilders (XHB) finally breaching levels not seen since before the 2008 meltdown.