The US Economy Has 99 Problems And The Strong Dollar IS THE BIGGEST ONE!

Whatever you say Janet… What ever… you say.

Members of the FOMC are getting tired of answering questions about the dollar’s strength and its effect on the US economy.  Each time the question is brought up, the FOMC member conjures up his or her best BS and everyone else just nods along. Now I believe they are full of it and that they know they are full of it. They are just cheerleading the economy the best they can because in truth their words are the only bullets they have left.

After all, last summer, the Bank of International Settlements (BIS) which Janet Yellen is a board member of, released a report  screaming about the dangers of the US dollar carry trade. Ever since the Fed printed trillions of dollars out of thin air, corporations around the world decided to borrow them to the tune of $9 trillion. As the DXY rises towards new decade highs, anyone who borrowed dollars in the last decade is now losing money and they will keep losing money as the dollar continues to rally. I’ve mentioned this multiple times on this blog, but it bears repeating because if these morons raise interest rates, they will blow up this carry trade and the global economy with it.

A lot of people see similarities in the Fed’s willingness to hike rates today and when it tightened back in 1937. However, there is a big difference. Back then, the dollar was not yet the world’s reserve currency. The gold standard had just broken down at the time and the global monetary system was in flux. In today’s world, the Dollar IS the reserve currency, and when the Fed tightens it forces the whole world to tighten with it, whether its ready to or not. So I argue, that any form of tightening by the Fed will be much worse now than it was in 1937. Because let’s face it, the world is not ready for a strong dollar by any means, ESPECIALLY CHINA.

China has not only pegged it’s currency to the dollar but of the $9 trillion carry trade, Chinese companies are said to have borrowed $3 trillion. So China finds itself between a rock and a hard place. Right now the strong dollar is artificially inflating the value of the Yuan and therefore hurting Chinese exports. Which means China loses competitiveness to Japan who has been able to devalue its currency by 20% against the dollar in the last year alone. If China were to devalue its currency by 20% to stay competitive then the $3 trillion those Chinese companies owe, would also increase by 20%. Good luck paying that back eh? So you’d expect a wave of defaults in China. With an over levered banking system that makes the US banks seem solvent, good luck taking that medicine. So either way China is screwed by the dollar’s rise.

Perhaps this is all part of the Fed’s and by extension the US government’s plan? Cripple China before she gets too strong? To me that’s the best idea I’ve come up so far other than Ockham’s choice that the FOMC members are arrogant fools.

 

Still Waiting For The Bottom In Oil: Part 2

Long oil was supposed to be the most obvious trade of the year. A drop of 60% in 6 months? That can’t be sustainable people thought.  So traders and speculators rushed in to buy as much oil as they could and put it in storage till the price rose again. Even the owners of the oil storage space bought oil in hopes that oil would make a V shaped recovery. And in Feburary their prayers seemed to be answered as WTI rallied from $44 to $54. But once again, reality set in. As supply rose and demand faltered, oil continued to drop reaching a new 6 year low in the past 2 days.

Now anyone who bought oil in hopes of making a profit in the future has lost money. Those loses will continue to mount as the cost of storing that oil has risen several multiples while the available storage space continues to plummet. The tanks in Cushing could fill up by as early as April, long before OPEC meets in June.

But it’s not just America who is running out of room. Storage space in Asia is rapidly running out. From Wolfstreet:

“I don’t think there is much space left to fill,” a Chinese storage executive told Reuters under the condition of anonymity. He said that in the Zhoushan area of Zhejiang province, where two SPR bases and major commercial storage facilities are located, tanks “are so full that one VLCC tanker owned by a state refiner has had to wait for almost 15 days to discharge.”

So what happens when the 2 largest importers of oil in the world run out of room? Consumption will drop. And we are already seeing that. Asian crude imports have dropped 5% from the peak in December. It appears that the Asian countries blew their load to early as oil prices are only set to fall from here. Which is devastating for the oil producers both companies and countries who need the oil revenues to survive.

People laughed at Robert Schiller when he said oil could hit $20 a barrel. With supply and demand mechanics like these he could have the last laugh. At some point production will have to be fall. OPEC doesn’t meet again till June, and before then I expect quite a few American shale companies to file for bankruptcy. I still believe the Oil and Gas sector is a great short as the market is discounting the likely hood of a further and SUSTAINED drop in oil prices.