The Global Dollar Shortage is Here – And It’s Becoming A Big Problem
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.
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.
And even more startling – it’s now at its highest level since 2008.
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.
The trend has been overlooked by the market over the last three years – mainly because many believe that U.S. growth will pick up, offsetting the higher interest payments.
But one thing’s certain – with current tightening policies in place, the cost for borrowing dollars short-term will continue much higher.
For dollar borrowers and the institutions depending on short-term debt – this is your wake-up call. Your liabilities are becoming difficult to service. And your assets are vulnerable.
This is not a good situation to be in. . .
I wrote back in April that there was a ticking time-bomb of over $7.5 trillion in debt that’s “highly vulnerable to rising LIBOR rates” (read here). . .
For instance – I said, “Both corporate and non-corporate business loans and commercial mortgages are about half tied to LIBOR. . . To put this in perspective, a 35-basis point increase could raise business loan interest costs by $21 billion. So, with yields rising – both on the short end and the long end of the curve – this could hurt the business sector. Which means the stock market. . . Just look at the stocks with high-floating rate debts (adjustable interest) having under-performed the S&P 500 when borrowing costs rose…”
So – I know the idea of a dollar shortage sounds strange to many. Especially because of how much the Fed’s printed since 2008.
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’. . .”
For example – we’ve already seen in China this year – they’ve had record onshore bond defaults as liquidity dries up.
So keep all this in mind and don’t be surprised if the markets suddenly plummet again. . .
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