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Last
week was a wash.
It was,
after all, a holiday week. Most traders on Wall Street had left their trading
desks well before Wednesday. Volume was light allowing those traders who were still manning the helm will have
a free-for-all pushing the market this way and that.
So
trying to make sense of this week is a pointless exercise. We are much better
off concerning ourselves with the big picture.
The Big
Picture is that the Fed has stopped its QE programs. As a result, investor
attention has shifted to when the Fed will begin raising interest rates. Will
the first rate hike come in mid-2015? Earlier? Later?
In
reality, most of this is political theater. We have not had a Hawkish Fed in well over 20 years
(possibly 30). As far as Greenspan, Bernanke, and Yellen
have been concerned, the answer to any and all problems in the financial
system has been to keep interest rates too low, print money, and buy assets
from Wall Street (a kind of “cash for securities trash”)
Why
does this matter? Because the last 20 years has shown us that the Fed
immediately cuts rates and turns on the printing press at the first sign of
trouble. Given the fragile state of the global economy and financial markets,
the likelihood of the Fed raising rates in a significant or unexpected way is
next to none.
Indeed, Ben Bernanke told a group of hedge fund insiders that rates
will likely not be normalized in his lifetime (he’s currently 61, so he’s
talking 20-30 years).
Again,
all of this is political theater. The big story for the markets is not
interest rates. It is the US
Dollar. For over 40 years, the world has been
borrowing US Dollars to finance real estate development, infrastructure
projects, mergers and acquisitions, Research and Development projects,
and the more. Today, globally, corporates and investors have borrowed over $9 TRILLION in US Dollars to finance other
investments.
To put
this number into perspective, it is equal to the economies of Japan and Germany
combined (they
are the third and fourth largest economies in the world by the way).
Why
does this matter?
Because
when you borrow in US Dollars to invest elsewhere, you are effectively shorting
the US Dollar. If the US Dollar begins to rally (strengthen) you can blow up
very VERY quickly.
Take a
look at this chart.
This is
the single largest chart pattern in financial history. It is a gigantic
falling wedge pattern spanning
over 40 years. When it breaks out to the upside,
we’re potentially facing a 5+ years US Dollar bull market that will see the
US Dollar rising to 120 if not 130.
And we just began to break it this year.
The
world is awash in debt, most of it borrowed in US Dollars. When the Great
Deleveraging truly begins, the US Dollar will rise rapidly as investors are
forced to either pay their debts back (shrinking the amount of Dollars in the
financial system) or default (ditto).
This
would fuel a massive collapse in inflated asset prices around the globe.
Anything and everything that was financed by cheap Dollars would collapse.
Entire companies would go bust… as would multiple sovereign nations.
And
this process has just
begun. This is why emerging market currencies are collapsing. Brazil’s Real
has lost over 20% of its value against the US Dollar in the last six months.
The Australian Dollar has lost 16%. And on and on.
The
real story for the world is not interest rates… it is that the era of cheap
US Dollar financing everything on the planet has ended. What’s coming will
not be pretty for anyone or anything that relies on cheap Dollars (this
includes stocks, bonds, and the like).
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