Dollar Global Margin Call In Progress
What's happening to the U.S. right now is deja vu of what happened to Asian currency markets in 1997 except on a global scale. I predict the end result will be the mother of all asset crashes (MOAC). Sooner than later.
An interesting thing happened this week that has never happened before. The Bank of Canada lowered interest rates for the third time this year and the Canadian dollar went up not down relative to the U.S. dollar. Then I realized that the same thing is now happening against every other currency that is easing - the Euro, the Aussie, the Chinese Yuan - they're all rallying against USD. And the only explanation is that these currencies have hit bottom relative to the $USD and it's the dollar's turn to go down. Global easing is priced in EXCEPT in the U.S. which has been the largest beneficiary of global asset flows.
Over the past two years since this tightening cycle began, the U.S. has been the primary beneficiary of global money flows. Both due to the relative yield premium on U.S. bonds resulting from aggressive Fed tightening and due of course to Tech inflows to the AI trade and the "Magnificent Seven". Now with each weaker data point, that global dollar carry trade is imploding. Too many pundits have been narrowly focused solely on the Japanese Yen, this is now about every major currency relative to the U.S. dollar. The AI trade and the $USD are now inextricably linked. Global investors are trapped by an imploding U.S. economy which is putting the dollar on the verge of meltdown.
The Fed is now in the same bind that every Third World nation finds itself in - having to choose between defending the currency or supporting the economy. The currency is losing. The Fed has never had to defend the dollar so they are not even contemplating the risks of further dollar collapse. Investors are caught in the middle. Many investors might conclude that asset classes priced in dollars will go up in dollar terms instead of down. However, that's not what is happening. Case in point is oil which is priced in dollars, and yet it's tanking at the same rate as the dollar. Obviously partly due to the global economy, but also due to the indiscriminate liquidation of U.S. based assets. Meaning that ALL tradable assets are now 100% correlated to an impending dollar selloff. Gold is the one holdout so far, but I predict it too will succumb to indiscriminate selling as it did in March 2020.
There is a lot of recession denial in the U.S. right now. The fact that the high end consumer is still buying Ferraris is obscuring the fact that the working class consumer is imploding. This week the dollar store fell BELOW the pandemic lows. All we're waiting for now is the one data point that confirms recession at which point the dollar carry trade will explode.
All of which means that the Fed can only make things worse by cutting interest rates. The Fed is about to learn what every Third World central bank already knows - you can't cut interest rates when the currency is imploding. Because then markets collapse.
We saw a minor preview of this during the pandemic when their initial .5% Fed rate cut led to a limit down stock market as global carry trades unwound. This time will be 10x worse.
In summary, the dollar's multi-decade "exorbitant privilege" is now ending from an investor standpoint. What is coming sooner than later is the mother of all crashes and then a policy response that is akin to pouring gasoline on a burning fire. Only when the Fed panics and takes over the bond market will things calm down. By that time, most asset markets will be a smoking crater.
For the time being, aside from some option "hedges", I remain patient in highly liquid t-bills earning 5%.
GAMBLE AT YOUR OWN RISK.
