Another week and another signal flashing red to deal with. . .
The credit market – in my opinion – is indicating an inevitable ‘crunch’ coming up. And even worse – we’re seeing the global dollar shortage deepening.
Many readers know I haven’t exactly been shy about focusing on this dollar shortage problem all year – you can read more here, and here.
Personally – I think this may be the trigger that kicks off a brutal, worldwide, financial crisis. . .
For instance – just look at what’s happened with Emerging Markets because of a tightening Federal Reserve, a stronger dollar, and drying liquidity.
Don’t forget – a dollar shortage is synonymous with disappearing liquidity. Which means we can expect more violent and sudden market crashes to occur – just like we saw over the last two weeks.
Stock markets (and bond markets) around the world took big losses. The only thing that really outperformed was gold.
The fear of rising ‘real’ U.S. interest rates and slowing economic growth (especially from China) is making investors rethink their positions.
Not to mention the cost of borrowing short-term dollars via LIBOR(aka London Interbank Offered Rate) is indicating aggressive financial tightening.
Take a look at the 3-month U.S. dollar LIBOR rate – it just had its biggest one day jump since late May.
So what does this mean?
Well – it’s indicating that the short-term borrowing of dollar denominated debt’s getting very expensive. And investors – especially overseas – are finding it harder and costlier to get their hands-on U.S. dollars.
This isn’t a big surprise – but what’s making me worried is just how costly and scarce these dollars are becoming. . .
Corporations worldwide borrowing dollars for business operations. And even ordinary citizens with mortgages and credit cards (which are mostly driven by LIBOR) will face higher interest payments.
Here’s what I wrote last week summarizing why the dollar shortage is kicking off… “the soaring U.S. deficit requires an even greater amount dollars from foreigners to fund the U.S. Treasury. But the Fed is shrinking their balance sheet… which means they’re sucking dollars out of the economy (the reverse of Quantitative Easing which was injecting dollars into the economy). This is creating a shortage of U.S. dollars – the world’s reserve currency – therefore affecting every–global economy…
This is going to cause an evaporation of dollar liquidity – making the markets extremely fragile… And since then – the evaporation of dollars has only worsened. The Treasury needs more dollars than ever as deficits continue soaring to levels not seen since 2008… The Fed’s ramping up their Quantitative Tightening (sucking dollars out of the banking system). This is pulling out as much as $50 billion dollars a month (or $600 billion a year) … Also – because of the Trump Tax Cuts – we’ve seen corporations take their cash piles back home. This suddenly yanked dollars out of foreign banks that were once ‘Tax Havens’. . .”
So keep all this in mind and don’t be surprised if the markets suddenly plummet again. . .