Alchanati Campbell & Associates
There’s no such thing as fundamental analysis in this market. It’s either: stay out of the market, cost-average at predetermined times, or stare at your phone for every second when the market is open (with stop losses and the flexibility to play the ups and downs). The market is being pumped up by printed money inflating the Fed’s Balance Sheet and open Fed operations in the MUNIs, high yield debt (junk) markets, and high yield debt (junk) ETFs. The market is unpredictable, but this week we saw stocks rise (positive news from the flattening of the virus death rates + more promised stimulus), Gold and other precious metals rise, high yield bonds rise (due to Fed stimulus), and the USD drop in value.
Trump and the Feds will be doing everything possible to keep the market from falling. When countries finance their way around a problem, they open the door to inflation. The increase in currency circulating means there is a much larger supply. When the supply of something goes up, unless it’s met with an equal demand, it’s value goes down. In this case, the demand for what we purchase with cash is not expected to rise. This could lead to a devaluing of currencies, which buys fewer goods and services. Any day now we can expect a treatment or a cure for the virus which will bump up the market. But Wall Street sees something we don’t see. Economic indicators like consumer confidence and initial claims have been worst than worse; with numbers looking more like The Great Depression. The last three weeks of jobless claims totaled 16.5 million unemployed. With the total US workforce being around 157 million, this comes out to an unemployment rate of ~10%. With this, we see a disconnect of the economy and the stock market; with the economy pointing towards a recession and the stock market indicating a new expansion. But there will be consequences in education, society, and debt bubbles. And even if the economy reopens, how long will it take for everything to be back to normal?
Dollar Illiquidity, or a dollar-denominated shortage, comes from a mismatch between supply and demand, with the later overpowering the former. When we are mentioning the USD, we are talking about all dollar-denominated safe assets, which are considered like-money. This idea of dollar liquidity can get very complicated, relatively fast, so we will leave it at this definition.
A dollar illiquidity crisis, in its simplest sense, means a dry-up of liquidity. This results in a general decrease in loans across the board. The second derivative consequence leads to a rapid appreciation of the USD, leading to strain on international trade and net imports outside of the US. We recently saw a sign of this dollar illiquidity through our repo market, whose rate blew up to over 10% in late 2019.
Now that we have what it means down, we can get into how this has come about. The major underlying cause of this stems from directly after world war 2 when the USD replaced the British Pound as the new global reserve currency. The global reserve currency is a central currency that is held by a majority of central banks and other monetary authorities for the means of international trade, cross-country investments, and most aspects of the global economy. The global reserve currency cements that nation as the most fundamental aspect of the global system. This creates a large demand for our US greenback, increasing our dollar prices. Realistically, this in part, leads to the US being viewed as a safe haven during times of global doubt. This is net positive for the US, while being negative for the rest of the world. Hypothetically, this should allow the US to not only weight out a global recession but should lead to increased risk-free and risky asset prices and further dollar appreciation.
The Alchanati Campbell and Associates Team
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.