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The $3 Trillion Ticking Time Bomb
The US Dollar rally is at risk of blowing up a $3 trillion carry trade.
When the Fed cut interest rates to zero in 2008, it flooded the system with US Dollars. The US Dollar is the reserve currency of the world. NO matter what country you’re in (with few exceptions) you can borrow in US Dollars.
And if you can borrow in US Dollars at 0.25%... and put that money into anything yielding more… you could make a killing.
A hedge fund in Hong Kong could borrow $100 million, pay just $250,000 in interest and plow that money into Brazilian Reals which yielded 11%... locking in a $9.75 million return.
This was the strictly financial side of things. On the economics side, Governments both sovereign and local borrowed in US Dollars around the globe to fund various infrastructure and municipal projects.
Simply put, the US Government was practically giving money away and the world took notice borrowing Dollars at a record pace. Today, the global carry trade (meaning money borrowed in US Dollars and invested in other assets) stands at over $3 TRILLION (larger than the economy of France).
This worked while the US Dollar was holding steady. But in the Summer of this year (2014), the US Dollar began to breakout of a multi-year wedge pattern:
Why does this matter?
Because the minute the US Dollar began to rally aggressively, the global US Dollar carry trade began to blow up. It is not coincidental that oil commodities, and emerging market stocks took a dive almost immediately after this process began.
This process is not over, not by a long shot. As anyone who invested during the Peso crisis or Asian crisis can tell you, when carry trades blow up, the volatility can be EXTREME.
The market drop in October was just the start. Once the US Dollar rally really begins picking up steam, we could very well see a crash.
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Best Regards
Graham Summers
Phoenix Capital Research
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So whats Graham saying here?? The dollar is about to get a whole lot stronger as the carry unwinds??
Much of the world borrowed cheap dollars but has to pay it back with expensive dollars. The emerging countries are in for a very rough ride.
I feel like things are starting...crude crashing is telling us something, and it ain't good. I see circuit breakers shutting down various markets including our own. We will see some amazing things happen, and the trigger to start it all will surprise everyone.
The law of unintended consequences is starting to pick up steam and now we have broadly networked, superfast computer systems that can do things to the markets that have never been done before with outcomes mere mortals will not be able to respond to. It's a great time to be a pessimist.
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They can still drag this thing out another 10-20 years until it all implodes. There could be 10% dips here and there, but they will be followed by 20% rallies within days.
43 years and counting.You really think they can get another twenty ?
It is possible, but not likely.History is no guide because of the telecoms we
have now.This can, and will ,change quickly. Too quickjly to be able to react to.
Best to assume its on for tomorrow and hedge accordingly.
Still waiting for the crash....... Is this it?
Crash - reminded me of this.
http://www.amazon.com/Crash-Dave-Matthews/dp/B000002WYT