That great bathtub gurgle sound you are hearing is the sound of all the remaining wealth on earth draining into the United States. Although the clue is in the name, what a lot of people don’t realise about a global reserve currency is that it has to be ‘deep’ enough to hold most of the world’s wealth. (Having a ‘deep’ alternative to the dollar was one of the largely-unstated goals of the dissolving Euro project.)
Below is the USD index after Friday’s close. This index measures the strength of the dollar against a basket of other currencies such as the Euro, Yen and Pound. It’s hovering around 100 and I am about to explain why it will get to at least 120 before we are done.
Let’s review what happened in January:
- The markets opened the month with their worst six days ever. When stocks go down that effectively means people are exchanging them for dollars. (And bonds, but also dollars. A lot of dollars.) So demand for a finite number of dollars goes up, so the USD index goes up.
- Capital is fleeing China with the force of an out-of-control firehouse because it is fucked. So fucked that it has taken to arresting traders who ‘short’ China. So that’s more demand for a finite number of dollars.
- This past week gone, the Bank of Japan announced a negative interest rate policy. That means there is now 5.5 trillion dollars in global bonds that have negative yields, which the FT has calculated as being 26% of worldwide GDP. $5.5 trillion that is now paying the governments of the world to hold their money.
- Stock markets around the world took off after this moronic policy announcement -that’s what it was intended to do- but this is largely achieved by making the Yen less valuable. So if you hold Yen you’re going to quickly exchange them for dollars. Which increases demand for dollars. So the index will go up.
- China will respond to Japan’s policy by devaluing its own currency again which means even more Chinese capital will go looking for a home between two shining seas. So the index will go up again.
Now you have to ask yourself two questions.
- What do you think Europe -which already has negative interest rates and is still money printing- will do as a result of Japan and China’s (looming) policy moves? It’s probably going to print more money and lower rates where it can.
- Some of that money is going to go into the German stock market which will take off just like Japan’s did. But where do you think the rest of it is going to go? Would you exchange your Euros for Yen or Yuan in this climate? No, you’d exchange it for… yep. The global reserve currency.
So all of this is in play and global commodities haven’t even found their bottom yet. Commodities decline as the dollar rises because it is essentially the same phenomenon: I can exchange my dollar for a bag of coffee or I can exchange it for two bags depending on whether there is more interest in dollars or coffee at the time. In fact, if you look back up at that USD index chart you’ll see the periods of weakness probably correlate with your memories of things getting more expensive. That’s how it all works. (It also means right now is the best time in almost ten years to buy a book that is denominated in British Pounds. And I just happen to have one for you!)
Readers in commodity countries -particularly Canadians and South Americans- are already feeling the effects of this great bathtub drain. And it will get much much worse before it gets better. This is Martin Armstrong asking the AI he developed, Socrates, for its forecast of the Canadian dollar:
Commodities are tanking and it is the sale of those commodities that allows governments to pay back their debts. Now when you get to countries that have borrowed in US dollars -and there is $9 trillion in foreign debt denominated in dollars- then the size of your debt gets bigger and your ability to pay it off gets weaker. So you default.
How is Marty Armstrong’s 2015.75 sovereign debt crisis looking to everyone now? Great chunks of South America are financial basket cases, even bigger chunks of the world have decided US hegemony is at an end and here we are at the beginning of an election year where the two frontrunners are a reality TV star who has gone bankrupt more than once and an elderly great uncle who has decided the last few decades of poor mathematics education means he can literally pull numbers out of the air and promise 330 million people a unicorn each. So it’s probably safe to say we’ve passed the peak in government.
US economic fundamentals
Now we get to why it is you or I should even care about this in the first place. The US economy is inarguably in very poor shape. That’s largely irrelevant at times like this where the only thing that matters is the perception that yours is the least worst house on the street. And, trust me, looking in from the outside there are a lot of worse houses on our collective little street.
Having visited the US a few times over the last couple of years I am well aware my darling American readers are all punchdrunk, weary and anxious from the endless media manipulation/entrainment and just the sheer disgust at witnessing what the war party (both sides of the aisle) is willing to do to stay in power and just. Fucking. All. This. Shit.
I’ve cut together some Catherine for you which gives a good overview of the macro situation and, inevitably, ends on quite a positive note.
If there is any consolation to be had it is there probably has never been a higher level of cross-border camaraderie between those of us that are being subjected to all this and a unity of loathing for those that are doing the subjecting. There is perhaps even more consolation in the fact that this camaraderie has the global elite really quite scared. China at least is being honest with itself that the large-scale redundancies that are occurring and will continue to occur threaten their social stability. But the rest of the Davos attendees know it. They also know ‘social stability’ is Chinese for ‘the current regime’.
There is probably more good and bad news. Unlike some of the previous economic collapses, this one does not seem to be proceeding according to plan. You can tell from the number of super elite hedge funds that have taken an absolute bath over the last six months, as well as some of the increasingly frantic globalist nonsense that Soros is spewing.
The trouble is the elite will come for your money -bank bail-ins and tax hikes- before they admit they fucked it up. This is already happening in Europe, China and Australia. It is inconceivable to them that they could be at fault.
So this is what I think the US is looking at:
- More downside in shares, some wobbles up and down on the USD index depending on whatever Europe does and whether people wake up and realise that a strong US dollar hits corporate earnings. The share downside may coincide with the increasing global conflict that appears to literally be in our stars between April and June. War will also increase the strength of the US dollar as investors become more risk averse.
- From the summer heading into an election you can’t have a tanking stock market, so don’t expect one. I’d be surprised if 2016 is a ‘sell in May’ year.
- The global bond market will continue to unravel across the year and send more and more money into US bonds (particularly if rates continue to rise), which will bubble top sometime between 2017 and 2020 and then the party will really begin. If the US ends up with either Trump or Sanders then whatever zany scheme they embark on may be enough to spook investor confidence in US bonds. Then all that money pours into the stock market, making the super rich super richer.
- Or it could just be the strong dollar which reduces the foreign earnings of listed companies that drops the S&P down a giant leg, sending all that money into bonds that bubble tops it. Too early to say but that tends to be what happens with strong dollars.
- It may be the need to ‘rebalance’ the strength of the dollar that is the excuse needed to tip the whole world into a digital currency, especially if it is associated with the end of the Euro.
The next four years are going to look nothing like the previous four. As seems to be the way of these things, it’s looking like my second album will drop just as all this starts to get astrologically interesting, and it is filled with magical and philosophical strategies for riding out the turbulence. Turbulence which will bounce us all around, wherever we happen to be seated.
So… hold onto your butts.