The financial world focuses far too much on stocks. The stock market, despite being at record highs (meaning record market capitalizations) remains one of the smallest, and least sophisticated markets on the planet.
Consider that stocks, even at current lofty levels, have a global market capitalization of slightly over $60 trillion.
In contrast, the global bond market is well over $100 trillion.
And the global currency market trades OVER $5.3 trillion per day.
It is currencies, not stocks, where the most significant moves occur. The currency markets are the largest, most liquid markets in the world. They are always first to move when things change. Stocks are the DUMB money compared to currencies.
With that in mind. I want to draw your attention to something that is happening in the US Dollar.
We’ve been following the greenback closely since it began a sharp rally last summer. But now things have really begun to heat up.
See the chart on the next page.
As you can see, the US Dollar has broken out of a massive wedge pattern that has been forming over the last eight years.
Why does this matter?
Because, globally, the world is awash in borrowed money… most of it in US Dollars.
When the Fed cut interest rates to zero in 2008 and flooded the financial system with liquidity, it funded an unprecedented amount of debt borrowed in US Dollars.
Everyone around the world, from traders to hedge funds to financial institutions and even global banks could borrow US Dollars at 0.25%… and invest in emerging markets, emerging market currencies with higher yields, infrastructure projects, corporate takeovers, etc.
In simple terms, the US Dollar became one of, if not the largest carry trade in the world. Globally the US Dollar carry trade is believed to be north of $3 trillion (the emerging market component alone is $2.7 trillion).
Now, a carry trade only works when the currency you are borrowing in remains weak. As soon as it begins to strengthen, your profits not only evaporate but you can end up deep in the red (remember you’ve borrowed $100 for every $1 you have in capital).
And the US Dollar rally has become a BIG problem for a financial system awash in borrowed Dollars. If the $3 trillion carry trade begins to unwind we could very well see a spike similar to that which occurred leading up to 2008:
Here’s the recent action:
Is the US Dollar about to send us into another 2008 collapse?
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