Maria’s Note: Maria Bonaventura here, managing editor of the Diary. Over the past few days, we passed along some highlights from the desk of 33-year currency trading legend Andy Krieger.
Andy showed us how to profit from heavy pressure on the Australian dollar… and how to play recent weakness in the euro. We even got a look into how, on the Banking Trust trading floor back in 1988, Andy’s contrarian intuition made him upwards of $50 million in just a few hours. But what you may not have heard yet is that, over the past few weeks, Andy has been sounding the alarm on a paradigm shift in the markets…
Andy believes problems in China and Japan could soon send shockwaves through the global financial system. And, as he explains in this weekend’s guest edition, that could kick-start a “subtle but insidious” coordinated effort by the world’s central bankers…
Central banks love stability… and hate surprises.
Like it or not, though… they’re about to see less of the former, and a lot more of the latter.
The currency market has been jammed into ever-narrowing trading ranges over the past five years. This compression is both unnatural and potentially dangerous.
And there’s evidence it’s about to break loose… which means a lot of the old themes dictating today’s market action will fly out the window…
The best way to describe market behavior in recent years has been to categorize it as either “risk-on” or “risk-off.”
In a risk-off scenario, traders buy Japanese yen, Swiss francs, and gold – the ultimate store of monetary value. They also buy dollars – the king of safe-haven currencies (as long as the risk doesn’t originate in the U.S.) – while selling currencies like the Australian and New Zealand dollars. They also tend to sell stocks and buy bonds.
In a risk-on scenario, traders do the opposite. They sell yen and Swiss francs, sell gold, sell bonds, buy stocks, and bet on strength in Australian and New Zealand dollars against the U.S. greenback.
The cycle we’re now entering, however, may be entirely different – a kind of hybrid where old patterns and relationships break down. A “new normal” that’s anything but.
Here’s just one example: We may soon see an era of dollar strength against the yen, with a persistence and magnitude that many won’t see coming.
The yen has been slowly weakening over the past 10 days and just this week, it broke through several significant technical levels. This move in the yen was fierce, and it is likely just the start of a major trend that will continue for months.
Japan posted awful GDP numbers last week. Based on the old, risk-off paradigm, one would expect the yen to strengthen on this news.
You see, over recent years, when conditions in Japan turned sour, Japanese investors repatriated some of their massive overseas holdings and converted foreign currencies into yen in order to prop up the system.
The recent move, however, was different. Things in Japan are so bad that Japanese investors accelerated their purchases of overseas assets, selling yen for U.S. dollars.
This is the opposite of what many expected, and is so unusual that it may be among the early warning signs that the old paradigms are breaking down. The economic challenges in Japan are only going to get worse.
Japan’s largest export market is China. Last year, Japan sold about $140 billion worth of goods into China. That market is going to take a hit this year. It isn’t yet clear how bad it will be, but China’s problems couldn’t be coming at a worse time for Japan.
China’s economy has shifted in recent years, becoming far more reliant on consumption. More than 60% of the Chinese economy is consumption-based, and the coronavirus has had a massive, negative impact on consumption.
The problems in China will send shockwaves through the global system. We certainly shouldn’t be surprised to see some of these shockwaves result in a stock market correction at some point in the future.
What Happens Next?
Japan will initially do the same thing they’ve done for the past 30 years – pump lots of fresh money into the system and hope the economy can recover. The central bank playbook is nothing if not consistent.
This time, however, I suspect it may be different.
Instead of just printing money and buying assets, Japan may ultimately be forced to take some extreme steps to ward off a crushing deflationary spiral. Just buying assets won’t be enough. Somehow they need to create economic demand, and this means that the Japanese will need to find a way to put that money to work.
This is a more complicated strategy, and so far, the Japanese have not done enough in this regard.
At the same time, we will likely see a globally coordinated effort by the major central banks to prop up their ailing economies with hyper-loose monetary policy coupled with blatant monetization. This means that the central banks will print money and then buy assets with this money.
Clearly, when someone supplies too much of any good, that good will lose value over time. The situation with currencies is no different. The yen and other major currencies are likely going to weaken significantly over the coming weeks and months.
Underlying this strategy, however, is a subtle but insidious goal: The world’s central banks mean to weaken their currencies to gain a competitive export advantage. It’s just like the old “beggar thy neighbor” strategy, undertaken in the 1930s by the major countries resorting to competitive devaluations.
The U.S. won’t be happy, but the U.S. economy is best able to withstand the onslaught of cheap goods flooding into our markets.
Another anomaly in this new paradigm is that gold has rallied alongside stocks. I think this tells us there are major problems bubbling just beneath the surface.
Stocks are trading at or near all-time highs, but a series of poor earnings reports may start to erode their support. Gold’s strength is sending us a warning about this disconnect.
Except for the Canadian dollar, the rest of the major currencies are in a subtle race to the bottom. I say “subtle” because it would be politically untenable to admit that the competitive devaluation of their currency is an objective. With that admission, a government faces the wrath of being labeled a currency manipulator, which carries onerous consequences.
Nevertheless, that is precisely what we are likely to see. The U.S. dollar will be king, and the U.S. trade deficit is likely to balloon out – along with the budget deficit. This poses different types of danger for the U.S. and for the entire global system.
There will be a point at which the twin deficits could create a major risk to the U.S. economy, including the possible risk of a downgrade to the U.S. credit rating.
But a different, far greater risk could also arise from this situation… something that I have long feared, but never verbalized, until now.
In an urgent briefing Thursday night, I explained how this risk could manifest in a Black Swan event before the year is over. I revealed my strategy for protecting your wealth when it triggers… and even playing it for profits.
As I shared with folks in my briefing, there’s a chance that you could leverage this Black Swan to turn every $1,000 into as much as $30,000. Learn more here.
Editor, Andy Krieger Trading
Like what you’re reading? Send your thoughts to [email protected].