Global markets are in a unique situation; the USD being the global reserve currency, issued sanctions on the world's largest energy producer. This caused 2 phenomenon in markets that usually happen as opposites (not together):
- Soaring USD Index, as real money flows drive the USD through the roof
- Domestic USD hyperinflation
Typically, as seen in extreme examples like in Turkey, inflation is connected to a falling currency because it becomes a game of hot potato. Banks offer high interest rates which only slightly overcome inflation, or don't (you end up getting 20% in the bank but inflation is 30%).
Meanwhile, asset prices from stocks to real estate are down, in many cases seeking a bottom.
These dislocations are due to the cause of the inflation. In the case of 2020, the Fed created Trillions of fresh USD which got injected right into the economy, assets went up. Now, we have a complex situation - because it's not only about energy, and it's not only about Russia. Suddenly you have an entire trading bloc that offers tons of products removed from the economy. Take a look at this data of Russian Exports, from OEC:
Non-energy products include Fish, Wheat, Fertilizer, Metals, Seed Oils, Cars, Wood, Chemicals, Coal Briquettes, and even Chocolate. So the price of fertilizer has skyrocketed, which farmers pass on to the consumer because they have no other choice. The average tomato travels 1500 miles before it arrives in your local Wal Mart. Increased diesel pricing as well as consumer fuel has caused all product prices to increase. These increases are passed on to US importers, and the US is (depending on how you calculate) actually the largest or if you want to say #2, that's fine - but the US exports a massive amount of goods, which are all priced higher. Now, those US importers need to pay the higher prices for those products. Make sense? This is driving domestic inflation, and it's also driving the USD Index through the roof - because those importers need to buy more USD in order to buy the same products.
What is the Fed's solution to this? Raise rates, break the market. At least they are providing great trading opportunities!
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