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The Anatomy of a Crisis: A Strong Dollar and Disappearing Liquidity
The Anatomy of a Crisis: A Strong Dollar and Disappearing Liquidity
Since March – the dollar’s rallied over 7%. And it’s caused the Emerging Markets to implode.
But the bigger problem is what lies ahead.
And that’s a global dollar shortage – which the mainstream continues to ignore. . .
I’ve touched on this a couple months back. Wondering when the mainstream would start to realize that the stronger the dollar gets – the more pressure global economies will feel.
I wrote. . . “This is going to cause an evaporation of dollar liquidity – making the markets extremely fragile. Putting it simply – the soaring U.S. deficit requires an even greater amount dollars from foreigners to fund the U.S. Treasury. But if the Fed is shrinking their balance sheet, that means the bonds they’re selling to banks are sucking dollars out of the economy (the reverse of Quantitative Easing which was injecting dollars into the economy). This is creating a shortage of U.S. dollars – the world’s reserve currency – therefore affecting every global economy.”
Since then, things have only gotten worse. . .
First: Jerome Powell – the Fed Chairman – issued a statement at the end of June that they would actually increase the amount of rate hikes over the next two years. This means they’re tightening even faster.
Second: the U.S. Treasury increased their debt-borrowing needs to the highest since the financial crisis – which was over a decade ago. Therefore, they will need even more dollars to fund their spending.
“The department expects to issue $329 billion in net marketable debt from July through September, the fourth-largest total for that quarter on record and higher than the $273 billion estimated in April [a 17% increase], the Treasury said in a report Monday. The department’s forecast for the October-December quarter is $440 billion, bringing the second-half borrowing estimate to $769 billion, the highest since $1.1 trillion in July-December 2008…”
…click on the above link to read the rest of the article…
Warren Buffet’s Favorite Stock Market Metric Is Signaling Huge Downside Ahead
Warren Buffet’s Favorite Stock Market Metric Is Signaling Huge Downside Ahead
Today – Apple became the first public company worth over $1 trillion dollars. . .
Thanks to very low interest rates – the company’s piling on debt and buying their own shares back – shrinking the float.
And because of a worldwide rush into mutual funds and exchange traded funds (ETF’s) – there’s crazy demand for Apple shares.
The king of ‘buy and hold’ investing and a Champion of equities – Warren Buffet – must a have grin on his face from ear to ear. Because Apple’s surge just netted him a huge profit for his company – Berkshire Hathaway – of over $2.6 billion.
Many, now, may be thinking that they should buy Apple and other such stocks – right?
Well, not exactly.
Because according to this favorite Buffet metric – the market looks extremely overvalued and the future looks scary.
The Market Cap-to-GDP metric is a long-term value indicator. And it’s become popular recently thanks to Warren Buffet.
During an interview in 2001 with Fortune – he claimed that this indicator is “probably the best single measure of where valuations stand at any given moment.”
And what his favorite indicator’s showing us today is that stocks are more over-valued than they’ve ever been. . .
So – what is the Market Cap to GDP – aka the ‘Buffet Indicator’?
It’s easy. Just calculate the total market value of all stocks outstanding and divide it by the nations GDP.
When the ratio is greater than 100% – it means that stocks are considered overvalued and have historically less upside going forward.
And when the ratio is less than 100% – it means the opposite. That stocks are considered undervalued and historically have more upside.
I look at it this way: when the ‘Buffet Indicator” is more than 100%, the stock market is negatively asymmetric (high risk, low reward). And when it’s less than 100%, the stock market is positively asymmetric (low risk, high reward).
…click on the above link to read the rest of the article…
“It Was Only A Matter of Time”: Trump Sets His Sights on the Fed’s Tightening and the Strong Dollar
“It Was Only A Matter of Time”: Trump Sets His Sights on the Fed’s Tightening and the Strong Dollar
Who says that the President doesn’t – and shouldn’t – pay attention to the U.S. Dollar’s value?
Well – President Trump sure does. . .
Just look at his tweets from this morning. . .
This came just a few hours after Trump criticized the Federal Reserve’s tightening path.
Trump went on to say during an interview with CNBC that he’s “not thrilled” with the Fed’s tightening – potentially slowing the economy.
“I don’t like all of this work that we’re putting into the economy and then I see rates going up.” said Trump
His comments shocked many. There’s a tradition – or rather a taboo – that the White House stays away from monetary policy.
But we should know better – Trump will always do what Trump wants.
And it’s clear that what trump wants is a weaker dollar. . .
So far, the Fed’s hiked rates five times since Trump entered office. And from what I can see, the economic growth cycle has peaked and now is heading downwards.
I’ve written that over the last 15 months – the U.S. economy has grown a bit. But that was all from a weakening dollar.
From January 2017 to February 2018 – the USD fell more than 14%. This greatly boosted exports and helped growth – not to mention the massive amount of debt the Treasury piled on and is trickled down into the economy.
But since March, there’s been a massive short-covering rally for the dollar. And that fueled a reflexive short-term feedback loop into an even stronger dollar, all-while decimating Emerging Markets and commodities – basically anything that’s anti-dollar.
Now the rapidly strengthening dollar is becoming a hinderance – especially when Trump has engaged the U.S. into a trade war with the second largest economy in the world – China.
…click on the above link to read the rest of the article…
‘The Markets Peaked’ – This Historical Indicator Signals Potentially Huge Losses Ahead
‘The Markets Peaked’ – This Historical Indicator Signals Potentially Huge Losses Ahead
Understanding cycle theory is still one of the most important things an investor can do.
Buying at the peak is a surefire way to increase your downside risk – even if your investment is sound. And buying at the bottom gives you a thick margin of safety – downside protection.
That’s why the best investors pay so much attention to where they are in the cycle.
The value-investing contrarian who runs Oak Tree Capital – Howard Marks – has written about the importance of cycles.
In fact – in his book, The Most Important Thing Illuminated, he writes two key rules. . .
“Rule number one: most things will prove to be cyclical… Rule number two: some of the greatest opportunities for gains and loss come when other people forget rule number one…”
And I fully agree with him. . .
There’s a powerful indicator that shows global economic expansion and contraction – it’s known as the ‘Global Wave’ (GW).
And going back the last 30 years – within a year of when things peak (top), there’s either a recession or some market crisis. And when there’s a trough (bottom), it’s followed by growth and gains.
Today – the Global Wave indicator’s signaling economic growth has peaked for this cycle. And both markets and economies are going to underperform for at least the next 12 months.
To be fair – some post-market peak downturns were brief and didn’t result in huge market sell offs. But the ones that did – like the 2001 and 2009 recessions – were brutal.
That’s why we need to ask ourselves a very important question: what’s most likely to happen over the next 12 months – is the Global Wave Indicator just noise(useless) or is it a signal(useful)?
If we look at the history of the GW, it’s not hard to see that things are most likely going to go down from here. . .
…click on the above link to read the rest of the article…
‘Something’s Wrong’: The Fed’s Creating Risks – But The Markets Ignoring It
‘Something’s Wrong’: The Fed’s Creating Risks – But The Markets Ignoring It
The other day I published an article calling out the markets denial of rising risks.
Even with everything that’s happening in Italy and with the Emerging Markets blowing up – expected volatility has actually decreased. . .
Basically, the stock markets pricing everything in for perfection – that the economy and markets will have low-volatility, steady growth, and calming inflation.
At least the bond market isn’t as gullible as the yield curve stays relatively flat – and heading towards inversion.
So, is it just us handful of skeptics and contrarians that don’t believe the mainstreams ‘everything’s great’ story?
Here are a couple other big names that are now doubting the ‘goldilocks’ scenario. . .
Ray Dalio and his firm, Bridgewater Associates – the world’s largest hedge fund, has been in the public eye lately thanks to his new, bestselling book – Principles.
In Bridgewater’s recent Daily Observations, the fund warns that, “2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the Fed’s tightening will be peaking…”
Bridgwater concluded with. . .
“We are bearish on financial assets as the US economy progresses toward the late cycle, liquidity has been removed, and the markets are pricing in a continuation of recent conditions despite the changing backdrop…”
Another added to the list of skeptics – a Morgan Stanley Top Analysts made statements on Bloomberg that markets are “heading into a summer that’s going to stay volatile...”
The question now we must ask is: what seems to be the common denominator behind all this volatility, instability in emerging markets, and liquidity problems?
The answer: The Federal Reserve’s tightening.
The Fed has to realize what they’re doing – I refuse to believe that the supposedly ‘greatest financial minds’ don’t do their research about the correlation between ‘easy money booms’ and ‘tight money busts’.
…click on the above link to read the rest of the article…
Blowing Up: The Italian Debt Crisis, the Experts That Missed it – And What’s Next
Blowing Up: The Italian Debt Crisis, the Experts That Missed it – And What’s Next
With the crisis unfolding in Italy, I can’t help but remember the lessons from the underrated book – Fat Tail by Ian Bremmer.
This book is an excellent read and explains how political risks can lead to severe economic and social risks.
But first, what exactly is risk? I sum it up into three things. . .
1. Probability – how likely is the risk to happen
2. Impact – if it does happen, how big will the loss be
3. Consequences – what is exposed to the impact, what are the second order effects (basically what’s the chain reaction from it)
Once we know the three parts to risk, we can start to understand how it works and what will be affected.
Bremmer’s book shows that throughout history, the government’s political risks – caused by their near-sighted policies – can lead to unknown monumental shifts and catastrophes. . .
“What do we mean by a ‘fat tail’? Fat tails are the unexpectedly thick ‘tails’ – or bulges – that we find on the tail ends of distribution curves that measure risks and their impact. They represent the risk that a particular event will occur that appears so catastrophically damaging, unlikely to happen, and difficult to predict, that many of us choose to simply ignore it… – Ian Bremmer, Fat Tail.
For instance, in the mid-1700’s, England’s King George was facing severe financial problems. Because of the costly French and Indian War, the British Empire was deep in debt. They needed to generate revenue – and quickly.
The Empire’s solution was to pass a series of new taxes designed to profit from the colonies in the 1760’s – the infamous ‘stamp act’ and ‘tea tax’. But these were wildly unpopular. And led to the colonies fighting for their independence in the American Revolution.
…click on the above link to read the rest of the article…
There is Over $7.5 Trillion In Debt That’s Highly Vulnerable To Rising Rates – Here’s What To Expect
There is Over $7.5 Trillion In Debt That’s Highly Vulnerable To Rising Rates – Here’s What To Expect
The 10-year interest rate hit the critical level of 3% this morning.
And this is the highest level it’s been since 2014 – four years ago. . .
A couple months back, I highlighted the correlation of the rise in the Fed Funds Rate (FFR) and the Interest Payments Due on the U.S. National Debt. And as President Trump and Congress are showing no signs of slowing down their borrowing – this debt service cost will only keep rising.
But the U.S. Treasury will get funded no matter what – foreigners will buy the debt, or the Fed will print dollars to do it. Either way, they will borrow – no matter the cost.
But individuals and companies that borrow aren’t as lucky. . .
They’re forced to pay the higher interest payments.
So, with interest rates moving up, it would be smart to see what businesses and sectors are most vulnerable to rising yields.
And for this, we need to look at the LIBOR rate. . .
LIBOR stands for London Interbank Offered Rate and is a benchmark rate that the world’s leading banks charge each other for short-term lending. It’s the first step when calculating interest rates on various kinds of loans – whether government bonds, corporate bonds, mortgages, or student debt.
You might have heard about LIBOR over the last few years. Many of the world’s leading financial institutions were caught manipulating the rate for years to profit and protect themselves.
Here’s an example: back in the 2007-08 financial meltdown, Barclays Bank manipulated the LIBOR downward. This lowering of rates in a time where rates were trending higher because of global bankruptcy risks gave off the impression that they were ‘less’ risky.
The LIBOR Scandal is known as one of the greatest financial crimes in history. And banks were hit with many billions in fines.
…click on the above link to read the rest of the article…
