Markets have tanked again this morning.
This is our new normal when it comes to watching the markets. Stock goes up for a bit, then down, down, down…
Today’s Aussie market falls come from the US market falls overnight.
It appears reality is sinking in that the coronavirus is going to hit the nation much harder than they anticipate.
Of course, using headlines as an investment tool is a pretty quick way to go broke.
Rather, I urge you to look at what’s happening beyond the headlines.
Part of that, is the shifting power with the US dollar.
You see, the US dollar is the linchpin of this fiat money system we operate in.
All commodities express their value in US dollars. Most major currencies have their ‘strength’ compared to the US dollar.
However, when you start to pull US dollars out of the financial system, the value of the US dollar goes up.
Yet the greenback going up or down in value isn’t a real problem anymore. Instead, it’s how many US dollars are available for use.
The flow of greenbacks around the world supports the financial system.
Because US dollars are in demand around the world, the American government can run up enormous US$22 trillion debts.
Central banks and governments around the world buy US Treasury bonds as part of their foreign reserves to protect themselves in a crisis.
And the more US bonds they buy, the more ‘money’ the Federal Reserve can print.
Essentially supporting the value of the US dollar.
In turn, the US government can keep running up their trillions of dollars in government debt, believing that everyone will always want US dollars.
It’s been this way for almost 40 years.
But, there is a very real chance that this cycle is about to come to an abrupt halt.
That there will be less demand for US dollars.
If that happens, the supply of greenbacks will shrink. Or as Jim calls it below, there’ll be a ‘shortage’ of US dollars.
Given that there is no other dominant currency to replace the US dollar, a drop in greenbacks is an enormous problem.
And this is nowhere in the news today. No one is talking about what happens if the rug is whipped out from under the financial system.
Don’t get caught off guard. As Jim explains, there are enormous implications if the supply of greenbacks starts shrinking…
Until next time,
The Great US Dollar Shortage
The coronavirus pandemic is a human tragedy. It’s also an economic tragedy, as the global economy is collapsing around us.
Second-quarter US GDP may drop as much as 30%, which is a staggering figure.
Many economists predict a third-quarter recovery, but there are still so many unknowns that it’s impossible to say.
It’s still too soon to say when the US will reopen for business. And you can’t just flip a switch and return things to normal. That’s not how economies function…
Centre of the financial system
Many industries may never recover and millions may be out of work for extended periods.
At the very least, we’re heading into a severe recession. And we could well be heading for a full-scale depression.
That’s not being alarmist.
The crisis will also accelerate the collapse of the US dollar as the world’s leading reserve currency. So you need to prepare now. What do I mean?
The US dollar is at the centre of global trade.
The US dollar represents about 60% of global reserve assets, 80% of global payments, and almost 100% of global oil sales. About 40% of the world’s debt is issued in US dollars.
The Bank for International Settlements (BIS) estimates that foreign banks hold over US$13 trillion in dollar-denominated assets.
All this, despite the fact that the US economy only accounts for about 15% of global GDP.
The reason the US dollar is the world’s leading reserve currency is because there’s a very large, liquid, dollar-denominated bond market.
Investors can go buy 30-day, 10-year, 30-year US Treasury notes, etc. The point is there’s a deep, liquid, dollar-denominated bond market.
But the coronavirus crisis is creating a massive problem for foreign nations dependent on the US dollar.
That’s because the world is facing a critical dollar shortage.
Many observers are surprised to hear about a US dollar shortage.
After all, didn’t the Fed print almost US$4 trillion to bail out the system after 2008?
Yes, but while the Fed was printing US$4 trillion, the world was creating US$100 trillion in new debt.
This huge debt pyramid was fine as long as global growth was solid and dollars were flowing out of the US and into emerging markets.
But that’s no longer the case, and that’s an understatement.
Global growth was anaemic before the crisis hit. Now it’s contracting rapidly…
Without the US dollar, China can’t control their currency
If dollars are in short supply, China can’t control its currency and emerging markets can’t roll over their debts.
But again, you might say, isn’t the Fed engaged in its most massive liquidity injections ever and extending swap lines to foreign central banks to ensure they can access US dollars?
Yes, but it’s not nearly enough to meet global funding needs.
Foreign nations are scrambling to acquire dollars right now. And that surging demand for dollars only drives up the value of the dollar, which puts additional strain on their ability to service debt.
When those debt holders want their money back, US$4 trillion is not enough to finance US$100 trillion, unless new debt replaces the old. That’s what causes a global liquidity crisis.
We’re facing a global liquidity crisis far worse than the one that occurred in 2008.
In fact, the world is heading for a debt crisis not seen since the 1930s.
The trend away from the US dollar was already underway before the latest crisis, led by China and Russia.
Now that trend will greatly accelerate as the world seeks to eliminate, or greatly reduce, its dependence on the US dollar.
That’s not just my opinion, by the way.
Here’s what Eswar Prasad, former head of the IMF’s China team, says:
‘The [US] dollar’s surge will renew calls for a shift from a dollar-centric global financial system.’
It can happen much faster than you think. And the US dollar’s days are more numbered now than ever.
All the best,
How Do You See Me?
Vern Gowdie, Editor, The Gowdie Letter
What do you see?
The vase? The two faces?
Life is rarely one-dimensional. There are always different aspects to consider.
For example, popular thinking has it that ALL this stimulus will be inflationary. Trillions here.
16% of GDP there. But what’s been lost in the argument/discussion is this detail.
The ‘newly minted’ dollars will not be enough to replace the lost earnings AND borrowing power of all those previously employed.
And (this is another big AND), if people — in sufficient numbers — somewhat rebuff the whole ‘debt-financed live beyond my means’ economic model, then global GDP numbers will shrink.
Yes, there’s more money being created than ever before. However, there’s a whole lot more being destroyed.
Central banks are always going to be behind the curve. They won’t know the extent of the damage until AFTER the (lagging) data is released. Then they’ll go (even more) ballistic. But will it be enough?
After a sustained period of deflation, will they try to get in front of this and do way too much? Do we then get inflation?
Questions to which, as yet, we have no definitive answers. However, anyone who thinks things are going back to normal when self-isolation ends, may want to think again.
This is whole new world stuff. The damage to (government, corporate and personal) earnings, resulting from this new normal, is what markets are currently grappling with.
How much? How long? How deep? How painful?
In due course, the altered economic model will be fully priced into asset markets. That won’t happen overnight.
Which is why investors should brace for further heart-in-mouth plunges.
If you have skin in this game — be it in superannuation, shares, property, money in the bank — you need to be conscious of the various aspects at play.
The good times are over, we have now moved into the make or break phase…and it requires you to see things differently.
And now to the topic of today…how do you see me?
The popular view — from the reams of feedback I’ve received over the years — is bearish, permabear, or chicken little…and they’re the polite ones.
Life is simpler if we label someone and place them in a pigeon hole.
However, that labelling came from a one-dimensional view, my investment approach during the ‘up phase’ of the cycle.
My investment philosophy is winning by not losing.
And by losing, I mean those capital-destroying losses that can take years or decades to recover from or worse, you never recover.
I am neither bullish nor bearish…just cautious.
Right about now I can hear the protests going up…
‘Surely, advocating putting all your money in cash is bearish?’
Those holding that view are looking through the wrong end of the telescope. In bullish (and getting more bullish) markets, your level of ‘bearish’ should rise. Sell into a rising market.
And conversely, in bearish (and getting more bearish) markets, your level of ‘bullish’ should rise. Buy into a falling market.
I struggle with why that’s so difficult for people to comprehend? It’s the time-honoured way to create lasting wealth.
Unfortunately, most people get it the wrong way round. The reason for my cash position was pretty straightforward…markets were feverishly bullish. That whole TINA narrative was reflective of that.
The ‘everything bubble’ — the biggest asset bubble in history — was ALWAYS destined to meet a pin.
And when it did, the sheer size of the bubble, meant it had/has the potential to be Great Depression-like ugly.
Why on Earth would you want your capital exposed to that? Makes no sense to me.
Timing the arrival of ‘the pin’ is a mug’s game. So you wait, safe in the knowledge your capital is intact and government guaranteed.
Those who looked through the big end of the telescope now have absolutely no idea just how much capital they have at risk.
Will it be 30% or 50%, or 65%, or nearly 90% like the Great Depression? The more this market falls, the more bearish those once bullish investors will get. The only guarantee you get with that approach, is the guaranteeing of losses.
By comparison, that government guarantee looks pretty good. So far, the All Ordinaries is down about 30%. Is that the end of it or is it just the first round? What do you think?
This initial blow the froth off the top correction has taken the All Ords back to a level first breached in 2006, 14 years ago.
‘Shares for the long term’?
But let’s bring the focus in a little tighter.
The All Ords most recent move above the 5,000-point level was in 2014. It took less than six weeks to wipe out six years of gains. That’s how quickly paper profits can be shredded and what if this market hasn’t finished yet?
How far back might the Aussie market go?
4,000 points…a level first breached in 2005?
3,000 points…a level first breached in 2000?
2,000 points…a level first breached in 1994?
These unknowns are why I opted for the known…100% of my capital not being exposed to capital-destroying losses that could take decades to recover from.
Is this a bearish stance or at 60 years of age, was this just me being prudent?
When markets are in the bearish zone — where I consider they offer far more reward than risk, then it’ll be time to turn bullish.
But not yet. We’re a long way from the bearish zone. Why?
Various valuation metrics I follow have us nowhere near the bottom.
And, social mood is still too high. There are far too many people who remain bullish. Reports of people rushing to establish online trading accounts is, to me, an indication of where the mob’s thinking is at present.
When it comes to markets, you really do need to practice self-isolation. Stay as far away from the mob as possible.
The mob — those looking at a one-dimensional world — invariably gets it wrong.
The time to buy will be when no one wants to buy. When online brokers are reporting a high level of inactive or closed accounts. The sound of market silence is what you want to hear.
Until then, I’ll wait and, as a bonus, banks have increased the term deposit rates. For now, 100% of my money is earning almost 2%.
That ‘known’ is far more appealing than the unknown level of capital loss AND dividend cuts that awaits share investors.
When looking at the various dimensions of investing, the one thing that’s most overlooked and the most difficult to value is peace of mind.
Unfortunately, it’s not until you lose it that you discover its real worth.
Winning by not losing is much more than a one-dimensional view of the world.
How do you see your situation now?
Editor, The Gowdie Letter
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