|
The US Dollar rally, combined with the ECB’s policies and the Fed’s hint
at raising rates in December, is at risk of blowing up a $9 trillion carry
trade.
When the Fed cut interest rates to zero in 2008, it flooded the system
with US Dollars. The US Dollar is the reserve currency of the world. NO
matter what country you’re in (with few exceptions) you can borrow in US
Dollars.
And if you can borrow in US Dollars at 0.25%... and put that money into
anything yielding more… you could make a killing.
A hedge fund in Hong Kong could borrow $100 million, pay just $250,000 in
interest and plow that money into Brazilian Reals which yielded 11%...
locking in a $9.75 million return.
This was the strictly financial side of things. On the economics side,
Governments both sovereign and local borrowed in US Dollars around the globe
to fund various infrastructure and municipal projects.
Simply put, the US Government was practically giving money away and
the world took notice, borrowing Dollars at a record pace. Today, the global
carry trade (meaning money borrowed in US Dollars and invested in other
assets) stands at over $9 TRILLION (larger than the economy of France and Brazil
combined).
This worked while the US Dollar was holding steady. But in the summer of
last year (2014), the US Dollar began to breakout of a multi-year wedge
pattern:
Why does this matter?
Because the minute the US Dollar began to rally aggressively, the global
US Dollar carry trade began to blow up. It is not coincidental that oil
commodities, and emerging market stocks took a dive almost immediately after
this process began.
The below chart shows an inverted US Dollar chart (so when the US Dollar
rallies, the chart falls), Brazil’s stock market (blue line), Commodities in
general (red line) and Oil (green line). As you can see, as soon as the US
Dollar began to rally, it triggered an implosion in “risk on” assets.
This process is not over, not by a long shot. As anyone who invested
during the Peso crisis or Asian crisis can tell you, when carry trades blow
up, the volatility can be EXTREME.
Indeed, the US Dollar as broken out of a MASSIVE falling wedge
pattern that predicts a multi-year bull market.
The market drop in August triggered by China devaluing the Yuan
(another victim of the US Dollar bull market) was just the start. Once the US
Dollar rally really begins picking up steam, we could very well see a crash.
If you’ve yet to take action to prepare for the second round of the
financial crisis, we offer a FREE investment report Financial Crisis
"Round Two" Survival Guide that outlines easy, simple to
follow strategies you can use to not only protect your portfolio from a
market downturn, but actually produce profits.
You can pick up a FREE copy at:
http://phoenixcapitalmarketing.com/roundtwo-ZH.html
|
