Some Notable Events That Grabbed My Attention This Week

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The Dollar Nears a Possible Turning Point

Rising inflation usually leads to a declining currency. We see that again in recent trends in the dollar.

The dollar surged late in 2016. But it hit a peak at the start of 2017 and declined steadily through the first quarter of 2018.

From there, the dollar appreciated against most other currencies and spiked higher during the early days of the coronavirus pandemic.

But the dollar peaked during the pandemic’s worst days in the second quarter of 2020.

Since then, the dollar steadily has lost value (except for a modest, brief bounce in early 2021) and recently reached its lowest values since early 2018.

The dollar now is below its 200-day moving average, which many technical analysts consider a sign of a declining market.

The dollar is reaching what could be an important turning point.

The Bloomberg Dollar Index remained below 1,100 for all but a small number of days for many years before 2015. But once the index shot through 1,100 in early 2015, it remained comfortably above that level.

The recent decline, however, is bringing the Bloomberg Dollar Index close to 1,100. If the index falls below 1,100 and stays there, we’ll have moved from a long-term dollar bull market to a long-term bear market.

This is another reason you should have some inflation hedges in your portfolio. I’ve been recommending a diversified portfolio of gold, Treasury Inflation-Protected Securities (TIPS), broad-based commodities and real estate investment trusts.

Taxes are Confusing

Many taxpayers apparently don’t know much about the tax code, and more importantly, they don’t know what they don’t know.

That’s according to a recent poll of 1,000 taxpayers by Credello, a personal finance services company.

The poll respondents were confident they were knowledgeable about taxes, with 83% saying they know enough or everything about taxes. Yet, about one-third of respondents received a grade of B or lower on a very simple tax quiz.

Here are some surprising results.

About 42% of respondents said if they use an accountant or tax preparer, that professional is responsible for any errors on their returns. In fact, the taxpayer always is responsible for tax return errors.

Amazingly, 44% said a taxpayer can claim a pet as a dependent.

Most people didn’t know the difference between their marginal tax rate and their average or effective tax rate. In a progressive tax system like ours, in which the tax rate is higher on income above certain levels, the marginal tax rate is your top tax rate or the rate paid on your last dollar of income.

The average or effective tax rate is your total tax bill as a percentage of your income. The average or effective tax rate is lower than your marginal tax rate.

Perhaps the reason for the low rate of tax literacy is where people receive their information about taxes.

When asked for the strongest influence on how they do their taxes, 35% said their family, 15% said friends and 13% said social media.

Seeking help from a reliable professional and online resources other than social media weren’t high on the list.

Digital Dollar Appears to be a Long Way Away

The growing popularity of digital currencies, such as Bitcoin, motivated many governments and central banks to plan their own digital currencies.

China has been the most aggressive, already testing a digital version of its currency in select cities and retailers.

Sweden and the Bank of Japan also are testing digital versions of their currencies.

But the U.S. Federal Reserve, which has the world’s reserve currency, is way behind and apparently creeping along.

In public statements, Federal Reserve officials emphasize various risks and challenges of establishing a digital currency and report little progress toward even testing a digital dollar.

The Fed is adhering to a timetable under which it will release a paper outlining its current thinking on the topic sometime in July.

Fed officials also say they are watching the actions of the other countries that are further ahead in testing digital currencies.

Perhaps the Fed is making more progress behind the scenes and will be able to roll out a digital dollar quickly after other countries iron out the kinks and make the concept more acceptable in international transactions.

But if one or more other countries establishes a full digital version of a currency first, the dollar might quickly lose its status as the preferred currency for international transactions.

The Data

New unemployment claims declined by 38,000 to 406,000 in the latest week. That is the lowest level since March 14, 2020, when initial claims were 256,000.

Continuing claims decreased by about 90,000 to just over 3.6 million.

The number of people receiving benefits under all the unemployment compensation programs declined a little to 15.8 million.

Personal Income decreased by 13.1% in April from March’s level. A sharp reduction in the number of new stimulus checks issued was behind the decline.

Even so, personal consumption expenditures (PCE) increased by 0.5% for the month. After factoring in inflation, real PCE declined only 0.1%.

The PCE Price Index, the preferred inflation measure of the Federal Reserve, increased 0.6% in April and 3.6% over 12 months.

Excluding food and energy, the core PCE Price Index rose 0.7% in April and 3.1% over 12 months.

Consumer Sentiment, as measured by the University of Michigan, rose slightly to 82.9 at the end of May compared to 82.8 in mid-month. That index was 88.3 at the end of April.

The Chicago PMI rose to a new record in May. The index was at 75.2, compared to 72.1 in April. This is the ninth consecutive month the index was above 60.

Pending home sales decreased 4.4% in April from March’s level. Over 12 months, pending sales increased 51.7%.

As with some other data, the 12-month increase is exaggerated because pending home sales were at an all-time low a year ago when much of the economy was closed due to the COVID-19 pandemic.

Durable Goods Orders declined 1.3% in April, compared to a revised 1.3% increase in March.

But excluding the volatile transportation sector, orders increased 1.0% in April. That’s lower than the 3.2% rise in March.

Core capital goods orders, which are considered a good measure of business investment, increased 2.3% in April, compared with a 1.6% increase in March.

The ISM Manufacturing Index rose to 61.2 in May from 60.7 in April.

The Kansas City Fed Manufacturing Index declined a little in May to 26 from April’s 31. The May number still indicates strong growth.

The Dallas Fed Manufacturing Survey also found that the manufacturing sector was growing in May but at a slower rate than in April.

The widely followed Production Index developed from the survey declined to 15.7 from 34.0 in April. The Dallas Fed says 15.7 still is well above average for the index. That’s the second consecutive month of declines. The index was 48.0 in March.

The General Activity Index declined a little to 34.9 from 37.3 in April. The average for this index is 2.6.

The PMI Manufacturing Index rose in May from April’s already-high level. The index was 62.1 in May, up from 60.5 in April.

The second estimate of gross domestic product (GDP) for the first quarter of 2021 was unchanged at an annual growth rate of 6.4%.

The Markets

The S&P 500 rose 0.34% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.78%. The Russell 2000 increased 4.01%. The All-Country World Index (excluding U.S. stocks) added 1.64%. Emerging market equities climbed 3.49%.

Long-term treasuries lost 0.75% for the week. Investment-grade bonds decreased 0.26%. Treasury Inflation-Protected Securities (TIPS) added 0.12%. High-yield bonds gained 0.25%.

On the currency front, the U.S. dollar rose 0.21%.

Energy-based commodities increased 3.15%. Broader-based commodities jumped 3.50%. Meanwhile, gold was unchanged for the week.

Bob’s News & Updates

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