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Dear Investor / Trader,
There’s a lot of eye-opening material in this week’s links. You’ll absolutely want to browse them. In comparison to the sleepy blue sky of recent years, the world is getting more interesting by the minute… and far, far more dangerous…
In terms of trends to watch and keep tabs on, like Tolkien’s “one ring,” there is one trend to rule them all. The rise of the mighty US dollar is the biggest trend in the entire world. It is a veritable tidal wave — and not a temporary tidal wave, but a massive trend that could last for years. The dollar bull is bigger than equities… bigger than oil… orders of magnitude bigger than gold… on and on.
The following, via the lead story in this week’s links, sets the tone. Via the UK Telegraph:
David Bloom, currency chief at HSBC, said a “seismic change” is under way and may lead to a 20pc surge in the dollar over a 12-month span. The mega-rally of 1980 to 1985 as the Volcker Fed tightened the screws saw a 90pc rise before the leading powers intervened at the Plaza Accord to cap the rise.
“We are only at the early stages of a dollar bull run. The current rally is unlike any we have seen before. The greatest danger for markets and forecasters is that they fail to adjust their behaviour to fully reflect a very different world,” he said.
…Hans Redeker, from Morgan Stanley, said the dollar rally is almost unstoppable at this stage given the roaring US recovery, and the stark contrast between a hawkish Fed and the prospect of monetary stimulus for years to come in Europe.
“We think this will be a four to five-year bull-market in the dollar. The whole exchange system is seeking a new equilibrium,” he said. “We think the euro will reach $1.12 to the dollar by next year and will be even weaker than the yen in the race to the bottom.”
Mr Redeker said US pension funds and asset managers have invested huge sums in emerging markets without considering the currency risks. “They may be forced to start hedging their exposure, and that could catapult the dollar even higher in a self-fulfilling effect.”
To understand how big the dollar trade is, consider this: The USD is the other side of a carry trade measured in trillions of dollars. That is trillions with a “T.”
Some estimate the USD carry trade to run about three trillion. Others see it as high as five trillion. Regardless, it is absolutely gargantuan. And the rising dollar means a great unwinding is at hand.
In tandem with its role as the world’s reserve currency, the US dollar serves as a “funding currency.” That means that the dollar is used all over the world to facilitate loans and leveraged transactions. Many emerging market economies, for example, will take out loans denominated in dollars rather than their own currency. The widely accepted nature of dollars makes the debts more liquid and palatable to international investors. Commodities, of course, are also priced in dollars. All over the world, transactions are made in dollars where a liquid “go between” medium is needed for parties dealing in less liquid home currencies.
The United States is the wealthiest country in the history of the world. Its economy alone has long represented 25% of global GDP. In stock market terms, this makes the USA like an Apple, Microsoft or Google in a world of small caps. As such, when the United States sends dollars out into the rest of the world — engaging in foreign investment, buying and investing on credit — that provides liquidity to the rest of the world. This liquidity then “greases the wheels” of economic activity for the entire planet. No other single economy is large enough, dominant enough, or diverse enough to provide this essential role. The United States, via the dollar, and via the USA’s highly active investing and borrowing activities, is a sort of first and last resort liquidity provider for the global free market economy.
Most “dollar doomers” don’t understand the macro and never did. They always underestimated the inherent strength of the US balance sheet. They never realized that, compared to the assets, cash flows and intellectual property America holds on its books, along with its long list of superlative “superpower” advantages — military superpower, agrarian superpower, technology superpower, innovation superpower, real estate superpower, now energy superpower, on and on — America’s national debt is about as onerous as a mid-sized car payment for an upper middle class family.
So here is the thing. Because the US dollar is a funding currency for the world, a falling USD is, in general terms, a bullish phenomenon. When the dollar is falling, global credit conditions are loosening, not tightening. A falling dollar means more grease for the wheels — more oil and lubrication for the global economic machine. Emerging markets can borrow more. US-based investors are more incentivized to invest abroad, and provide the funding for dollar-denominated loans in overseas markets. US multinationals are more incentivized to seek overseas profits, which fatten their bottom lines when converted to weakening dollars. A falling dollar also acts as a tailwind for rising commodity prices, which boosts emerging market fortunes and encourages global mining and drilling and exploration activity.
A rising dollar, however, is the equivalent of a broad-blanket tightening of global credit conditions. It takes all the above effects and slams them into reverse.
A sharply rising dollar puts emerging markets in very grave danger, for example. It highlights the perils of borrowing in a currency other than one’s own. When the dollar rises, dollar-denominated debts suddenly become much more expensive in real payment terms, even as emerging market economies face economic slowdown and investor capital flight simultaneously. This is the equivalent of a highly leveraged business suddenly seeing the real cost of interest payments rise, even as sales slow dramatically and credit lines are being yanked — all at the same time.
And we have already seen what a brutal rise in the dollar does to commodity prices and commodity producers. It absolutely destroys them. In this week’s links you will find the below, via Bloomberg:
As oil prices plunge, so goes the value of high-yield bonds.
Traders are dumping dollar-denominated notes of speculative-grade energy companies today as oil reaches a three-year low: Petroleos de Venezuela SA bonds fell more than 4 percent and some Halcon Resources Corp. (HK) notes have lost about 6.5 percent.
The moves extend $8.4 billion of losses for junk-rated energy-company bonds that have accumulated since the end of August, Bank of America Merrill Lynch index data show.
Oil prices are driving credit markets — where energy companies account for a record proportion of speculative-grade bonds — as investors consider the possibility of both deflation and less income for commodity-dependent nations such as Venezuela…
This is only the beginning, do you understand? It has barely just begun. That $8.4 billion sounds like a lot, but it is just a drop in the bucket compared to what is coming.
Emerging markets are set to experience severe crisis as a rising dollar effectively imposes severe credit conditions and amplified default risk. Leveraged commodity producers, for example shale producers at the margins with too-high breakeven costs, will start to see their finances implode, effectively insolvent as cash flows fall below the ability to service loans. Whole countries will be in jeopardy. Russia is, in a word, screwed. The fallout goes on and on. Vicious feedback loops will replace previously existing virtuous ones. It is going to be a bloodbath. And there is no way to stop it.
Remember, again, the estimated size of the USD “carry trade” — yield-related investments exposed to rising dollar reversal — is measured in the trillions. There are institutional investors with massive, massive exposure via their overly aggressive allocations to emerging market investments, commodity producer debt, high yielding carry trade currencies like the Australian and Canadian dollars, and so on.
Those inertia-driven institutional investors, giant herding beasts that they are, got themselves heavily over-exposed at the very top of the cycle, just as they always do. Just as always happens in every major market cycle. And now the great unwind is coming. And they will feel it full force, and be forced to withdraw, and their withdrawal will accelerate the pain trade as global conditions tighten further.
Equity markets celebrated the hail mary “all-in” surprise QE move from Japan last Friday. This made us laugh out loud — not least because we have a very large bearish yen position (to go along with our very large bearish euro, Australian dollar, Canadian dollar, and British pound positions) that immediately began to make us lots more money.
The trigger move from Japan was very bullish short-term equities, that’s true. What else can you say when a government pension fund that holds more than a trillion in assets commits out of the blue to buying hundreds of billions worth of equities, both domestic and foreign.
But the bigger picture is that Japan’s move was born of deep desperation… that Japan is initiating a “currency war” that is exporting deflation to struggling competitors… and that last-ditch hail mary attempts of Japan, and soon Europe and possibly China, to weaken their currencies in an attempt to spur growth will only make the dollar even stronger.
And now you know what happens (as we just explained) when the dollar gets brutally stronger…
Equity markets — particularly large cap US multinationals — continue to bear the stamp of “dead man walking.” Nearly half of S&P 500 revenues come from overseas. Investors have been relaxed about US dollar damage prospects because ominous language has not yet shown up in official corporate outlooks. This is laugh-out-loud short-sightedness.
In Reminiscences of a Stock Operator there is an anecdote about a market operator who says that, when he is walking down the railroad tracks and hears a train coming, he has the common sense to sidestep — and doesn’t even pat himself on the back for doing so. Complacent investors lack this basic modicum of common sense. The dollar is that train… and anyone with eyes and ears can know that it is coming.
We find it amusing to see the dollar’s relentless rise now plastered on the front page of financial newspapers. It reminds us of an old concept, the “page sixteen principle.”
In a nutshell, the page sixteen principle says that you don’t make money from headlines on the front page of the newspaper. You make money from the small print stories buried on page sixteen, as they slowly make their way toward page one. That means you have to have the guts and the tenacity and the powers of analysis to dig out those stories, to find the future big trends… find a place to hop on them… and then have the guts to ride them.
That is exactly what we did with the US dollar trade — now the biggest trend in the entire world. We nailed it cold on page sixteen, and we have endless examples of published and time-stamped proof.
Consider this post we wrote on November 27th, 2013: Don’t Underestimate the US Dollar.
Much of the story was laid out right there… almost a full year ago… and we have been incredibly vocal since then. In our twitter streams, in daily articles, in our weekly and daily publications, we have pounded the table hard enough to break it.
Here is another example, from December 2013, of how our blueprint for the future (regarding Europe this time) had came to pass. Magical powers from a crystal ball? No. Deep understanding of macro drivers, coupled with diligent analysis and awareness of odds and probabilities? Yes.
As with most of our material — like the piece you are now reading — we don’t go in for wanky little sound bites or fluffy technical observations unsupported by surrounding context. We give you the full steak, not just the sizzle — the deep structure analysis of what makes a potential trend powerful. And we eat our own cooking too. We are heavily short the yen from an average cost basis below 106 in USDJPY (which is now above 115, and rises as the yen weakens). We are heavily short the euro (EURUSD) from a cost basis above 1.33 (the euro is now below 1.24). Commodity currencies, same thing… our short Aussie cost basis is above 90 cents… and these moves are just beginning.
We tell you this to inspire you, not for the sake of bragging. Is it possible to see a major trend coming well in advance — to put the pieces together and see, with great clarity and conviction, that something huge is happening? Yes, absolutely.
Is it further possible to “eat your own cooking” in heaping helpings — to use a combination of fundamentals, price action and sentiment to build large positions and pyramid them? Again, yes absolutely. We didn’t just nail the greenback in hand-waving analyst terms — those “ghost gamblers” who take phantom positions with no real capital on the line. We’ve got real capital in play (and the time stamps and trade logs to prove it).
As Soros and Druckenmiller — two of the greatest ever — have pointed out, it’s not how often you are right or wrong. It’s how much you make when you are right, versus how much you lose when you are wrong. The first key is understanding the implications of the biggest, most powerful trends in existence. The second key is figuring out how to make sure they don’t hurt you or otherwise destroy your capital base. The third key is figuring out how to actively exploit those trends… how to position yourself to ride the tidal wave.
The mighty USD megatrend is nowhere close to done yet. Again, it is barely just beginning. Look at Europe and China. Look at the news coming out of China as gathered in this week’s links. Europe is on a crash-course date with disaster, worsened by Germany and accelerated by currency war competition from the yen. China is a slow motion train wreck in waiting — a source of significant global slowdown — with odds of a forced devaluation in China’s currency increasing by the day (Japan’s yen devaluation increases those odds too).
How about the Fed? Will the Federal Reserve come to the rescue? Bwahaha. The Federal Reserve doesn’t give a rip about the global economy. As far as the Fed is concerned, they’ve done their job. The US labor market is healing, even tightening. And what could they really do anyway? The gap between the US economy and the rest of the world is grand-canyon-sized.
The icing on the cake for total dollar denomination is the US midterm election results. Republicans had a surprising sweep to power, cutting far deeper into Democrat ranks than expected. This matters because the Federal Reserve fears a Republican congress, and always keeps a weather eye on political threats. Republicans in general are “hard money” advocates — pro-austerity, anti-inflation and anti-Fed. As such Republicans will reflexively praise continued shrinking of the US deficit… and renewed strength in a currency they have reflexively berated for weakness over the years.
If you give any credence to our powers of analysis, consider the following very carefully. The current situation in global equities — and large cap US stocks in particular — reminds us of the dollar situation in late 2013, except in reverse.
We saw the potential for a rampaging dollar bull trend long before everyone else did. We pounded the table while nobody else paid attention. We kept our powder dry, meanwhile, by paying close attention to price action and sentiment, which helped us avoid losing capital via positioning too early. It was an odd thing, for a while, because even with the writing on the wall the market seemed to be oblivious. But then the fever broke, and the dollar roared forth (with our trend positions on board, suitable for later pyramiding).
This is what always happens. The crowd is terrible at listening for the train as it comes down the tracks. This is why we see the same thing in terms of US equities now. Bruce Kovner, one of the greatest global macro traders of all time, observed that his favorite trades involve a massively wrong consensus. The general consensus that equities will be “ok” even as the dollar roars and the USD carry trade comes apart at the seams is one of the biggest instances of “lots of people wrong” we have seen in years, perhaps since 2008.
“Stage two” of the massive multi-year dollar bull run will be a slaughtering of US multinational profit outlooks, via global economic slowdown and escalating gray swan crises (Europe and China, cough), even as profit margins and revenue forecasts are cut and institutionals are forced to retreat in semi-panic from emerging markets and leveraged yield investments. The Fed, meanwhile, will likely do mostly nothing, or far from enough, in part restrained by a Republican congress even as the ECB and PBoC are forced into Japan-like panic.
We anticipate our big killing in 2015 — along with more forex gains as we continue to ride the biggest trend in the world — will be on the short side of equities, both individual and broad-based.
If you would like to better understand our thinking… and to participate with us in both major trends and micro-level equity opportunities, long and short… then you should be reading the Strategic Intelligence Report.
The SIR is our weekly newsletter, published 47 weeks per year, which highlights our “macro level” positioning and thinking, along with a “tactical view” covering key price action developments and a well-researched long or short idea. There is nothing else like it in the financial world — and the cost is surprisingly low.
You can now access back issues of the Strategic Intelligence Report, and find out how to subscribe, by going here:
www.mercenarytader.com/SIR
Mercenary Links November 7th: US dollar set to dominate for years… gold, oil plummet to multi-year lows… Republicans dominate mid-terms… the world’s greatest counterfeiter, why time never runs backward, and more.
Dollar smashes through resistance as mega-rally gathers pace
The Strength of the U.S. Dollar Reflects Global Economic Reality
Dollar at seven-year high versus yen after Republican victory
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Canadian dollar sinks to 5-year low on oil price war, ‘very dovish’ BoC
Australian dollar plunges below 86 US cents to four-year low
Morgan Stanley Turns Mega-Bear on Australia
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Plummeting rouble loses central bank support – FT.com
Wheels Finally Fall Off Russian Ruble
Russian Ruble Hits All-Time Low as Support Reduced
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Brazilian real skids to a 9.5 year low
Yen May Top 115 Per Dollar by Year End
Euro at 2-year low after Draghi comments
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Gold Careens To 4.5-Year Low, Hit Again By USD and Equities
Behavioral Macro: The Second Wave of the Bubble Unwind is Upon Us
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Plunging Gold Price Has Mining Companies Selling at Loss
Cooling Chinese Demand for Gold Adds to Gloomy Global Outlook
Investors start hedging bets on Swiss franc as gold vote approaches
~~~
Inflation? Deflation Is New Risk
Bernanke: Inflation Isn’t Happening, QE Critics Dead Wrong
Singer’s Elliott Says U.S. Growth Optimism Unwarranted as Data ‘Cooked’
~~~
Euro falls below $1.24 for first time since August 21, 2012
European Central Bank united on €1tn liquidity injection
ECB ready to do more if needed, signs up to Draghi’s target
~~~
Exclusive: Central bankers to challenge Draghi on ECB leadership style
Reuters poll: ECB can weaken euro but only via sovereign QE
Cracks in the Stress Tests of European Banks
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Kuroda Has Draghi in a Bind as Euro Soars Against Yen
Warnings from Japan for the eurozone
European Commission slashes eurozone forecasts
How to talk about a European recovery that never arrives
~~~
It Looks Like $80 Oil Is Here to Stay
Why Oil Prices Went Down So Far So Fast
Oil hits 4-year low after Saudi discount
Oil under pressure as supply concerns fade
~~~
Americans Are Shocked At How Low Gas Prices Have Fallen
Going out on a limb, North Dakota oil titan scraps hedges
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Saudi Oil Market Fight Shifting to U.S. as Asia Prices Rise
Saudis Cut Crude Prices to U.S. in December Amid Shale Boom
Saudi trip to Latam evokes 1990s oil troika with a new rival: U.S.
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Saudi Flexing Met With Crickets by U.S. Shale Frackers
Shale Basin Breakeven Prices
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Texas College Town Fracking Ban a Bad Sign for U.S. Boom
Energy Industry Files Challenge to Texas’ First Fracking Ban
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He Ripped Their House Off the Grid: Tales of the Solar Middle Class
The company that’s spreading solar energy by making it a boring investment
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Oil Erases $8.4 Billion for Junk Traders After Debt Binge
Big Oil Feels the Need to Get Smaller
Drillers Cut Expansion Plans as Oil Prices Drop
US Oil Companies Pressure To Clamp Down On Spending
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Exxon, Chevron Post Higher Earnings Despite Drops in Production
Chesapeake subpoenaed by DOJ, states over royalty payments
Buffett Railroad’s Shale Focus Blunts Ports’ Comeback Bid
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US commercial property prices reach new high
Where did all the big buyouts go?
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U.S. recovery is frustrating — but envy of the advanced world
U.S. Economy Up 3.5% in 3rd Quarter, Best 6 Months in Over Decade
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U.S. services sector slows; private payrolls increase | Reuters
U.S. consumer sentiment at highest since July 2007
U.S. consumer spending falters; wage gains highest since 2008
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Wider U.S. trade deficit, weak exports point to slower growth
U.S. Deficit Decline to 2.8% of GDP Is Unprecedented Turn
U.S. Trade Gap with China, 80% of Trade Deficit, Hits Historic High
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Kuroda Surprises With Stimulus Boost as Japan Struggles
Cheaper tomorrow? Bank of Japan battles entrenched ‘deflation mindset’
Bank of Japan opens the floodgates
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Hedge funds pursue alternative lending
A Recent Surge of Leveraged Loans Rattles Regulators
Creditors Keep Troubled Law Schools on Life Support
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Republicans’ First Step Was to Handle Extremists in Party
President Obama Left Fighting for His Own Relevance
How Obama Lost the Senate
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Fed’s Bullard Upbeat on Economy, Sees No Need for New Stimulus
Goldman Disagrees With The Fed On Labor Market Slack
U.S. jobless claims, wages data point to tightening market
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Fisher hopes new Congress will not interfere w Fed’s independence
Why Senator Richard Shelby Could Be a Thorn in Yellen’s Side
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First-time homebuyers hit lowest level in nearly 30 years
mortgage bond issuance the lowest since 2000
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China: What Goes Up Must at Least Slow Down
Short-seller Chanos says China seeing faster capital flight
China’s growth in danger of slowing more sharply
Portugal Finds Chinese Make 90% of Bids at Property Sale
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China’s carmakers stuck in reverse, despite upgrades – FT.com
China Puts the Brakes on Car Makers
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Man Running World’s Biggest Wealth Fund Tackles China Riddle
Macau Casino Industry Bound for Worst Streak in Austerity
Macau casino revenues fall by a record in October
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Norway: Braced for a new wave of investment
Facts About The Texas Economy
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FT interview with Google co-founder and CEO Larry Page
Google Renews Its Cloud Efforts
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Sean Rad Out As Tinder CEO. Inside The Crazy Saga
Uber and Its Shady Partners Are Pushing Drivers into Subprime Loans
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What Bubble? Silicon Valley’s Younger Set Opts for Optimism
Venture Capital Performance Slips in 2Q, Longer View Looks Rosier
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U.S. ETFs Climb Toward $2 Trillion in Assets
Fastest-Growing Family Office Rides Rise in Ultra-Rich
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Chrysler Profit Leaps 32 Percent as Truck and S.U.V. Sales Grow
Toyota’s Quarterly Profit Jumps
Ford’s aluminum truck is a game changer
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Apple Watch starts countdown on face off with Swiss industry
Apple Watch Pricing $500 for Stainless Steel, $4,000 for Gold?
How Apple Creates Leverage, and the Future of Apple Pay
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McDonald’s Bringing Back McRib in 75% of U.S. Restaurants
Big Macs go cold as young Americans drop McDonald’s for tastier rivals
Meat Companies Go Antibiotics-Free as More Consumers Demand It
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Alibaba’s results affirm growth, but margins slide
Amazon Is Testing Taxis for Deliveries
Dell’s Life After Wall Street
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Home Depot Hackers Exposed 53 Million Email Addresses
‘WireLurker’ virus hits iPhones and iPads
What’s Behind the Great Podcast Renaissance?
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Sony Posts Hefty Loss for July-September
Wal-Mart Weighs Matching Online Prices
Office Depot beats estimates but keeps sales warning
Pyramid scheme or not, Herbalife is tanking
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In Private Papers, A More Candid Tim Geithner Speaks Out
Bank of America Lowers Results as Foreign Exchange Talks Heat Up
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“You have euros in Ireland? Why do you have euros in Ireland?”
E.C.B. Threatened to End Funding Unless Ireland Took Bailout
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Ireland Moves to Close One Tax Break and Opens Another
Luxembourg vows to end banking secrecy amid tax allegations
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Virgin Galactic’s SpaceShipTwo crashes during testing
Branson battles to keep space dream alive
Investigators in Virgin Galactic Crash Focus on Tail Booms
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Platt’s $50 Billion Hedge-Fund Dream Deferred
Nicaragua’s First Billionaire Is Country’s Sugar King
Billionaire Thomas Peterffy wants to be your Interactive Broker
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Robert Mercer, VIP political money man you’ve never heard of
Janus chief Dick Weil revels in Bill Gross hire
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Ray Dalio’s Bridgewater Management Principles
Ray Dalio On Success And Humility
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Candy: The next battle in America’s health war?
Studies show High-fat diet postpones brain aging
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AC/DC drummer Phil Rudd on New Zealand murder plot charge
U.S. shuts down Silk Road 2.0 website, charges alleged owner
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The World’s Greatest Counterfeiter: Frank Bourassa
Pipino: Gentleman Thief
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How the U.S. Government Tested Biological Warfare on America
How Gravity Explains Why Time Never Runs Backward
Newly discovered fossil could prove a problem for creationists
People who have their kids after 35 are happiest
Recent Mercenary Links (scroll for archives)
(select a post)
Mercenary Links: The Dollar is a Lawnmower and The World is Grass
Mercenary Links: Hawkish
Mercenary Links: The Financial Engineering 500
Mercenary Links: Inflation Already Happened
Mercenary Links: Get Used To It
Mercenary Links: No Soft Landing
Mercenary Links: Buyback Idiocy
Mercenary Links: Don't Party Like it's 1999
Mercenary Links: 57-year High
Mercenary Links: Falling Prices Ahead
Mercenary Links: Crackdown
Mercenary Links: Hey Ma
Mercenary Links: Forty-Seven Percent
Mercenary Links: Dollar Pressure
Mercenary Links: If it's Nae Scottish, it's Crap
Mercenary Links: "We Are Done"
Mercenary Links: That Sinking Feeling
Mercenary Links August 29th: Ahem, Nukes, Cough
Mercenary Links August 26th: Everything is Expensive
Mercenary Links August 22nd: Pushing Europe into Depression
Mercenary Links August 19: Betting On Collapse
Mercenary Links August 15th: Convoy Attack
Mercenary Links August 12th: Pretext for Invasion
Mercenary Links August 8th: Bombs Away
Mercenary Links August 5th: Major Warning Signs
Mercenary Links: Growling Again
Mercenary Links: $29 Billion
Mercenary Links July 25th: Big Doubts
Mercenary Links July 22nd: Stupid Deals
Mercenary Links July 18th: E
