The financial walls are closing in but QE provides the illusion that all is well as capital finds its ways into stock and bond markets at home and abroad. In the UK, the Bank of England voted in favor of maintaining its key policy rate, but the decision was split with three of the nine policymakers pushing for a rate hike. The degree of disunity surprised some investors. Nevertheless, interest rates remain at or near record lows for every country.
Ray Dalio of Bridgewater mentioned that 2017 was like 1937. The Dow Industrials lost roughly half its value in 1937. But the US stock market continued its relentless rise because global central banks did not materially reduce levels of QE even though they had claimed that was their plan. Of course, such promises are never kept when the world has faced this much debt. Instead, economies remain stagnant despite the doctored GDP, jobs, and inflation data that suggest otherwise.
The US Fed has been the only central bank to materially tighten, a process known as quantitative tightening, or QT. But the Fed cannot raise rates faster than is discounted in the interest rate curve. Meanwhile, the rest of the world will continue to need easy monetary policy. QE remains at or near record levels. Since the world is deeply interconnected, this will ultimately impact the US such that the US Fed will have to increase QE at some point within the next year or two, despite the current and planned rate hikes. Dalio suggests based on the study of long term debt cycles that a major devaluation of fiat currencies will have to happen within the next couple of years. This will further usher in the era of bitcoin, the world's first decentralized digital currency. As more nations lean toward becoming "bitcoinized", this should propel the price of bitcoin to new highs once again. Certainly, those nations whose currencies have been losing value fast such as in Argentina and Venezuela have been putting savings into the US dollar as well as into bitcoin. But what happens once the dollar devalues, perhaps akin to how the US government devalued the dollar overnight during the Great Depression?
In 1933, the US government made it illegal to own more than a couple ounces of gold. All gold in one's possession had to be handed over. The US government then devalued the dollar by 41% when the price of gold was adjusted from $20.67 per ounce of gold to $35 per ounce. Other major economies followed suit. Of the larger economies, only the French and Italians continued to adhere to the gold standard, and their economies remained depressed until finally, in 1936, they allowed their currencies to devalue, and their economies then recovered.
Such a day of reckoning is upon us. The only question is when. A year, maybe two?
In the meantime, the QE can will continue to get kicked down the road, helping hard assets and stock markets rise. The US will remain the tallest standing midget thus has and will continue benefit the most from QE.
Futures are lower on concerns that trade tensions between the U.S. and major trading partners including China and the European Union could escalate. President Donald as Trump on Sunday issued new threats against America’s trade partners, calling for them to remove trade barriers and tariffs, or face the consequences, stating in a tweet, “The United States is insisting that all countries that have placed artificial Trade Barriers and Tariffs on goods going into their country, remove those Barriers & Tariffs or be met with more than Reciprocity by the U.S.A. Trade must be fair and no longer a one way street!”
Market Lab Report - Premarket Pulse 6/25/18
|Published:||25 Jun 2018 05:45 ET|
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