Seemingly “stratospheric” US equity market gains in 2017 and early 2018 drew an overenthusiastic profusion of admiration from most market observers. Unfortunately, much of the admiration was based upon a mirage built upon dollar weakness, temporarily boosting the appearance of foreign earnings translated back to dollars as well as headline equity returns – particularly from multinationals and commodity producers whose nominal numbers were elevated most.

Currency devaluation and excessively easy financial conditions rarely lead to sustained high-quality economic growth for consumer-driven economies but they can certainly help in the short term. Today’s boosted nominal corporate earnings and GDP tend to lead to tomorrow’s higher interest rates and lower consumer purchasing power, eventually stunting momentum. The same can be said about sharply higher deficit spending at the wrong time in the business cycle in terms of promoting short-lived prosperity.

The longer-term impacts of stealing growth from the future increasingly play heavily into our prevailing macro themes as what was once the long-term moves closer to “now.” It is also why long end US bond yields are near the top of our monitoring list. The pace of long end interest rate movement will help us signal just how much juice is left in this everything bull market – if any at all. The last thing an asset owner wants right now is for interest rates to move too far, too fast as markets reprice the duration risk premium.

While domestic US investors long of risk assets have enjoyed shiny looking PnL numbers for the past several quarters, unhedged foreign investors can’t quite say the same.

Below you can see recent US equity returns in dollar terms vs. euro terms – not nearly as pretty of a picture for foreign investors. If foreign investors don’t expect the dollar pendulum to swing back anytime soon, they will demand much higher interest rates to compensate for the currency and inflation risk. Additional UST damage won’t do risk assets any favors and neither will trillion+ dollar deficits as far as the eye can see. Watch long end bonds.

021318 eur based sp500 returns muted by usd