The Next Shoe to Drop

In 2014, when we forecast that the US dollar would appreciate to levels that the masses could not fathom, many thought we were nuts. How could we make such a prediction when at the same time, we were highlighting the massive, unsustainable US debt situation? And it wasn’t just that the US was in a […]

The Next Shoe to Drop

In 2014, when we forecast that the US dollar would appreciate to levels that the masses could not fathom, many thought we were nuts. How could we make such a prediction when at the same time, we were highlighting the massive, unsustainable US debt situation?

And it wasn’t just that the US was in a serious debt situation, it was the how aggressively they were adding to that massive debt. It took the US almost 220 years to rack up its first $8.5 trillion in debt… then they doubled it in the last 8 years alone.

The US total Federal debt is now over $18 trillion & growing.

While the US continues to pile on more debt, the amount the government must pay to service that debt increases. According to the US Treasury Dept data, last year the US government spent $430 billion just to pay the interest to service their outstanding debt.

That is a mind numbing number… $430 billion to cover just one year’s interest on the debt. And that is when interest rates are at historic lows. What happens when the interest rates ‘normalize,’ & double from current levels? Obviously, the payments to service this debt would also double.

So we understand why people get confused when we highlight all these minefields, yet at the same time forecast that the US dollar is going to reach levels that no one else can imagine.

The ‘least ugly’

The US dollar will collapse eventually, but not yet. One of the main messages that we keep preaching is that we are in a global economy, & while the US has built up a massive, unsustainable level of debt, an amount that can never be paid off, there are other countries & regions that are in even more dire trouble than the US. The reality right now is, the US is the ‘least ugly’ of a group of very ugly global economies.

While rising rates will hurt the US economy, it will massacre many of the Emerging Market countries & companies. Why? – because these countries & companies have accumulated huge amounts of US dollar denominated debt.

When the US Federal Reserve started dropping the interest rates in 2008, it flooded the globe with cheap money. Hedge funds & large investors jumped in on this US dollar carry trade (borrow in US Dollars & then re-invest in other assets).

It seemed like a no-brainier to them. if you can borrow in US Dollars at 0.25%, & move that money into anything yielding more… you could make a killing. Hedge funds were borrowing $10 million, paying just $25K in interest & then turning around & buying some Emerging Market bonds yielding 8%-11%. locking in massive returns.

What could go wrong?

It wasn’t just hedge funds or investors that were taking advantage of this cheap US money, governments & companies also borrowed in US Dollars to fund various projects. Everyone was scooping up this cheap money & re-investing it in other areas. The latest estimate that we can find show the total amount of money borrowed in US dollars & invested in other assets = $9 trillion.

Now the Fed is looking to ‘normalize’ rates. With rising interest rates in the US, the ensuing rise in the value of the dollar will wreak havoc among emerging markets’ governments, financial institutions, corporations, & even households. Because they have borrowed trillions of dollars in the last few years, they will now face an increase in the real local-currency value of these debts, while rising US rates will push emerging markets’ domestic interest rates higher, thus increasing debt-service costs further.

We keep reading & hearing various analysts warning of the demise of the US dollar. Yes, eventually, the US dollar will come under serious pressure, but that time is not now. What these mainstream analysts keep missing is that we live in a global economy & right now the US is NOT the big problem.

Look at this chart… it tells the story. The US dollar is gaining strength against ALL major currencies.

It also explains why commodities, precious metals etc are getting hit, they are priced in US dollars. When the dollar rises, the value of those assets declines.

In order to survive this coming economic tsunami, you need to stay clear of:

  • long-term bonds, especially Euro & Japanese bonds
  • the Euro & the Yen

If you are not an American, you want to convert a good portion of your local currency to US dollars on any rally in your local currency.

What we are witnessing is the US Dollar carry trade breaking apart. Before it’s over, we will see a global crash, with the strong US dollar sending the US economy into a deflationary spiral.

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