Why the Dollar Could be Headed Sharply Lower

Over the past week we have seen more chaos emanating from the White House, although this time it wasn’t Trump flip-flopping on policy and further fulfilling the Financial Times’ depiction of him as the TACO president (“Trump Always Chickens Out”). Instead, the Trump White House hit new lows with the astonishing breakup of the Bromance between Trump and Elon Musk.  The backdrop to the breakup was the report that Secretary of Treasury Scott Bessent and Musk traded strong words, with Bessent attacking Musk by describing his $100 billion in savings as pitiful and then angrily labeling Musk a fraud.  Musk responded as any good South African rugby player would by plowing his shoulder into Bessent’s rib cage.  Bessent responded as any proper Ivy League graduate would, by punching Musk in the face, which is the real reason that Musk had what might be the world’s most famous (and most deserved) black eye.  Multiple witnesses confirm that it took a few people to break up the mind-boggling fight that took place right outside the Oval Office. The fallout from this fight was fast and fierce, with Musk viciously attacking Trump’s Big Beautiful budget – largely crafted by Bessent.  The situation further devolved into a nasty, personal war of words, with Musk claiming  that Trump was one of the people who participated in Jeffrey Epstein’s highly illicit sexcapades.  

I write about this lurid affair because it is a reminder that we must seriously consider what sort of people we have running the U.S. government and directing the economy of the most powerful nation in the world. It would make life easier if the fight were the brainchild of Saturday Night Live writers, but sadly this bizarre story actually happened … and it continues.  The stock market had a brief sell-off on the news of the Trump-Musk feud, but retail and institutional investors stepped in to buy the market dip. Somehow they concluded that an economy with rapidly slowing growth, plummeting consumer confidence, persistent inflation well above the Fed’s 2% target, emerging trade wars between the U.S. and its major trading partners (which can easily push inflation higher and weaken the economy), the highest tariffs in ninety-five years, and infantile behavior from the government’s leaders all point to higher stock valuations.  

Hmmm. They didn’t cover this sort of market analysis in my finance and macroeconomic courses at Wharton.  The fact is that markets have a fascinating ability to move beyond rational analysis and economic fundamentals. They can soar to wildly overvalued heights or plunge to deep undervaluation, all driven by waves of greed and fear. These dramatic fluctuations create significant opportunities for traders to capitalize on mispricings.  I believe that buying stocks on the news of last week certain fits in the category of crazy greed, and it is likely symptomatic a growing bubble in stocks that will end very badly at some point.