US DOLLAR SCREAMING POTENTIAL GLOBAL RECESSION!

Gordon T Long

Global Macro Research | Macro-Technical Analysis

TIPPING POINTS

US DOLLAR

US DOLLAR SCREAMING POTENTIAL GLOBAL “RECESSION”!

The Dow Jones index is down 13.95% since early January. The S&P 500 is down 20.2% in the same period. The Russel 2000 is down 28.7% and the Nasdaq Composite down an even more spectacular 30.5% this year. This now places the S&P 500, Russel 2000 and Nasdaq solidly into a bear market (down 20% or more from an interim peak), while the Dow is presently in only correction territory (down 10% or more from an interim peak). Meanwhile, U.S. Treasury bonds, foreign currencies, gold and other commodities have all declined sharply side by side with stocks.

There is now a clear prospect of a US recession and serious global slowing which could cause stocks, gold and commodities to fall further in a synchronized fashion.

THE “FLIGHT-TO-SAFETY” TO THE US DOLLAR TELLS YOU ALL YOU NEED TO KNOW!

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WHAT YOU NEED TO KNOW

The US Dollar has spiked due to weakness in the Japanese Yen, EU’s Euro and the Chinese Yuan. This is in addition to a global “Flight-to-Safety” with fears of a global slowdown, stagflation and the overwhelming fact that central bankers are at least 18 months behind the curve.
Buyers of US Dollars are chasing the dollar but are not buying US treasuries in normal “Flight-to-Safety”. This is because they are seeking liquidity and therefore maximizing liquidity by keeping the dollars in cash.
Emerging Markets are under particular troubles, because as their economies slows, their abilities to pay their loans denominated in US Dollars is steadily increasing,
The May Financial Managers Survey (FMS), which polls 331 Managers with $988B in AUM, saw the highest cash levels since April 2020 as the markets plunged due to Covid.
How far down can bond yields go when actual Fed Funds are still going up? How far down can the US dollar go when the 1-month Treasury bill is 41bps, and trending lower, when Fed Funds is 100bps, and trending higher? This all screams ‘Eurodollar collateral shortage’ and a potential Global Recession or minimally seriously low growth rates!?

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DOLLAR HAS EXPLODED HIGHER.

WHY HAS THE US DOLLAR EXPLODED HIGHER?

The result of an unusual concurrent collapse in the three major global FX currency reserves:

Extreme Weakness in the Japanese Yen,
Extreme Weakness in the EU Euro,
Extreme Weakness in the Chinese Yuan.

FLIGHT TO SAFETY

Investors are selling these three currencies and fleeing to the safety of the US dollar. What is most troubling however is they are not been buying US Treasuries with those newly acquired US Dollars. This raises two questions:

Who is selling US Dollars?
What are they holding their new US Dollars in?

LIKELY ANSWER:

The Fed is issuing Dollar Swaps for Global central banks to maintain dollar liquidity.
Buyers are staying liquid in cash since investment professionals know nothing disappears faster in a crisis than liquidity!

EURUSD

Nearing possible support

JPYUSD

Nearing possible support.

GLOBAL PROBLEMS

We talked about global problems, including China, in our last newsletter. Therefore we won’t repeat it here.

However, for those actually paying attention, we heard the earth shake and shudder last week as US retail numbers confirmed everything we feared about recession, inflation and consumer confidence. It’s time to pay the bill for the exuberant excesses of the 2009-2021 bull market. As the music slows, the world is spinning into a proper, full-on, consumer led recession.

On Tuesday it was Walmart’s disappointing numbers, and yesterday Target’s precipitous 25% drop on the back of retail misses sent the pictures dropping off the wall.
On Thursday, the tumbles continued across Occidental markets after Tencent released equally shocking numbers as Covid, lock-downs, and cost of living concerns hammer spending.

$550 billion in market value was erased from consumer stocks over the past five days, adding to the downward pressure on a market already strained by fear of inflation and rising interest rates. On Friday, the S&P 500 — weighed down by the heavy losses in its consumer sectors — briefly dipped into bear-market territory, a 20% decline from its most recent high.

Stores are awash in products that consumers don’t want. At the same time, the cost of finding new goods to sell and getting them into stores is surging as fuel, labor and other expenses climb. Walmart and Target both slashed their forecasts for profit this year as inventories ballooned and price increases failed to keep up with rising costs.

Walmart and Target both said more customers are trading down to cheaper, private-label groceries:

“The NEEDS are squeezing out the WANTS”

When solid, dull, boring and predictable retail businesses like Target are crashing 25% intraday… that’s as good a time as any to worry. The scale of the market crash is being magnified by the number of folks who’ve been expecting it, but also by algo/computer led sell programs kicking in as the market down-spikes.

I am shocked the market was “surprised” by supply chain disruptions, rising fuel and freight costs, inflation outstripping wages and crashing consumer confidence impacting numbers at leading retailers. We have been yelling about this in these newsletters for months now!

Bill Blain concludes in the “Morning Porridge” that we are now seeing:

“… the unravelling of the last 14 years of Central Bank monetary distortion. In the normal business cycle the booms and bust come with the inevitability of the rising/falling tide. The wonderful sand-castles built on the beach of consumer spending is washed away… and you rebuild it tomorrow.. bigger and better..

This is different. We’ve been putting this off for too long. This is a tidal wave that threatens the very beach itself.

Yesterday I highlighted how a decade of central bank monetary distortion has changed the way capitalism works – I explained one of the reasons Boeing has gone from great to terrible company was the distorting effects of easy liquidity changing a brilliant engineering company to a terrible financial slash and burner.”

CREDIT MARKETS SIMPLY DON’T BELIEVE THE FED!

Credit markets as in US Treasuries and Corporate HY and IG bonds haven’t priced in a recession (as shown to the right by markets percentage pricing in of a Recession), because they believe the Fed will soon capitulate on its plans to tighten (QT).

It is inconceivable to professional money managers that the Fed, after delaying tightening for much too long, would now tighten going into a recession. The Bond and Credit markets believe the Fed would prefer to crash the equity markets to fight inflation rather than hike rates in a historically highly over-leveraged financial market.

NOT PRICED IN TO CREDIT AND BONDS!

Money Managers don’t believe the Fed’s Narrative!

ECHO BOOM

Emerging markets are driving part of the global economic slow-down. The short-term trend is really poor. This is shown to the right and exemplified by the Goldman Global CAI, which dropped to 0.6%, driven by a slowdown in Emerging Market growth.

I wrote extensively during the 2013-2014 “TAPER” era that massive lending in US Dollars by Emerging Markets would eventually act as a “boomerang”, to them I called it the “Echo Boom”. Heavy US denominated debt with weakening EM economic growth would eventually place them in an impossible position. This would be particularly problematic if global growth overall slowed! This is exactly the problem we have today.

FINANCIAL MANAGERS SURVEY – MAY 2022

Global recession: A real tail risk.

Number one tail risk remains hawkish central banks, but recession continues to be a huge tail risk. According to the latest FMS, this is the second biggest tail risk and it increased last month.

Nobody is expecting a stronger economy.

Latest FMS shows a lot of bearish fund managers. Growth expectations remain very weak.

This “industry rotation” trade signals recession.

Cyclical vs. Defensive industry rotations pricing sharp slowdown in growth.

Market-implied US recession probabilities.

US 10y-2y yield curve and cyclicals / defensives point to a higher probability of a recession. (Maximum history since 1950)

CONCLUSION

1- GLOBAL TIGHTENING INTO A RECESSION???

Goldman’s “Global Financial Conditions” index (shown to the right).

The Global Financial Conditions Index has tightened dramatically.
The US FCI lags the global FCI but is now at tightening levels last seen during the 2018 hiking cycle.

BofA shows, to the right, global manufacturing PMI has a lot of catching up to do if we are to follow the current path of central banks.

It is almost inconceivable that the Federal Reserve will dramatically reduce its balance sheet under current Economic and Financial conditions. The bond market is clearly telling the Fed that it simply does not believe they will follow through on their rhetoric!

2- THE CRYPTOCURRENCY GLOBAL “BELL WEATHER” IS COLLAPSING

The biggest collapse among major asset classes is in Bitcoin and other cryptocurrencies. I view this asset class to be a Global “Bell Weather”.

The price of Bitcoin has fallen over 55% since last November, when Bitcoin peaked at around $69,000. Bitcoin is currently trading at $29,647.
As is so often the case, gullible investors jumped in when Bitcoin was riding high. Now, 40% of all Bitcoin investors are underwater on their holdings. Like the saying goes, nobody blows a whistle at the top.
Huge losses have arisen in other popular cryptocurrencies, such as Ethereum (down 57% over the same period), XRP (known as Ripple) and Solana.
Still, neither of those crypto collapses were the most spectacular. A crypto currency called Luna fell from $116.84 on April 5, 2022, to $0.0062 on May 16, an incredible 99.9% crash in less than six weeks. That’s not just a crash, it’s a complete wipe-out!

It just shows you how crazy speculative manias can become, completely unhinged from reality.

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