Monday, 29 April 2024

By Ryan Dinse Editor, Crypto Capital and Alpha Tech Trader

[4 min read]

Dear Reader,

Over the weekend, I got caught up in a bit of doom-scrolling on Twitter (now X.com).

This was the chart that had everyone in a panic:

The Japanese Yen is depreciating very fast against the US dollar right now.

Some people are concerned this could be a ‘canary in the coal mine’ moment.

A signal that the proverbial is about to hit the fan.

This comment summed up the general vibe:

‘This is it. We're moving to a new stage of the Endgame. Japanese Yen ripping through barriers like paper, passing each level where the BoJ intervened before.

‘The slow-motion meltdown has finally begun to accelerate, and authorities are powerless to stop the decline, unless they want to dump their Treasuries.

‘Yellen probably on the phone with them tonight, warning dire consequences if they put their finger on the button to defend their currency. Japanese PM Kishida met with Biden this month, smiling on the surface, but pain underneath.

‘He knows, as Kuroda does, the terrible truth: They are TRAPPED.’

While this kind of cataclysmic mood can be found on Twitter most weeks, some of the more serious professionals are worried too.

Former Pimco CEO and ‘bond king’ Mohamed El-Arian noted there was severe pressure on Japanese authorities to act quick on this.

But he also added:

‘The risk for Japan is that such intervention could prove ineffective without accelerating the normalization of monetary policy.

‘Here the authorities worry that such acceleration could undermine the ongoing economic resurgence. Plus they think this is more a US driven process than internal.

‘Bottom line: It’s complicated.’

It’s the same message as the first poster, albeit delivered a bit more calmly.

What are they both getting at?

Rock and a (very) hard place

Basically, a falling Yen is likely to lead to higher inflation in Japan. This would normally mean higher interest rates to combat it.

Like our central bank in Australia is doing right now.

But here’s the thing…

Japan has an eye-watering debt-to-GDP ratio of 263%.

That’s the number one position in the world (with Venezuela coming in second)!

Increasing interest rates would likely cause debt to balloon even further (as interest payments ramp up) while simultaneously dragging on economic growth.

A double-whammy.

Alternatively, they could sell their US dollar holdings (Treasury Bills) to try to defend their currency.

As you can see here, they’re a big holder of US government debt:

The problem here is that any fire sale of US bonds will likely drive the price of those same bonds down.

Meaning, they’ll devalue their own holdings in the process.

And as the first poster alluded to, the US also doesn’t want Japan dumping their bonds right now.

They’ve got their own economic headaches.

Last week, the US had a massive 50% downside miss on GDP (economic growth).

At the same time, inflation came in red hot.

This raises the dreaded spectre of stagflation, which occurs when an economy slows down while inflation remains high.

Like Japan, this situation has hamstrung the Fed when it comes to interest rates, which are now expected to remain high.

Bear in mind, the debt situation in the US right now looks like this, too:

So, where does all this leave you and me as investors then?

Lessons from the 1970s

Look, I’m not going to pretend I know what will happen next.

As I said at the start, markets always have all sorts of doomsayers, and most of the time, they are wrong.

The economy muddles through all sorts of issues more often than not and 99% of the time, the worry isn’t worth the angst.

It could all be a storm in a teacup.

That said, it’s clear to anyone who has studied history that the global monetary system is about to face a reckoning in the coming years.

That’s just how economic cycles go.

As an investor, thinking about how to hedge yourself against these possibilities is never a bad idea.

In the 1970s, real estate, energy, commodities, and gold/silver proved to be good investments in a stagflation-prone environment.

Stocks and bonds, not so much — though you could make an argument for defensive and value stocks at the right time too.

In today’s world, I’d also include Bitcoin — a new form of digital gold — as a useful hedge against a monetary system that’s clearly out of control.

But there’s a caveat...

If you own Bitcoin, you need to do so in a way where you have full control over your holdings.

Only ‘self-custodied’ Bitcoin is safe from the more extreme possibilities of government intervention.

Bitcoin ETFs — though easy to use and a good driver of overall demand — don’t offer this protection.

They’re ‘paper’ Bitcoin.

Of course, like any asset, you need to consider the risks and rewards on offer before you invest — and only then can you make a proper portfolio allocation decision.

But you need to think fast.

Because if things do get as bad as the doomsayers think, they’re likely to try and close the exits — including your access to buying Bitcoin.

Leaving you stuck in a world with soaring inflation and falling asset values all at once.

Many will be stuck in a pot like a slowly boiling frog, unaware of what's about to happen.

Prepare accordingly.

Good investing,

Ryan Dinse,
Editor, Crypto Capital and Alpha Tech Trader

Ryan is a former financial advisor who over seven years helped more than 600 clients and had more than $150 million under management. This experience taught him that the mainstream investment industry has no interest in helping clients strive for greatness. He was told to make ‘safe’ investment plays and settle for average returns. It wasn’t good enough for Ryan.

In 2016, he embarked on a renewed mission: to help ordinary people lock onto extraordinary trends before they go mainstream. He’s an experienced small-cap trader and an expert in cryptocurrencies. He first bought Bitcoin [BTC] in 2013, when it was around US$600. Today, it’s around US$30,000.

His crypto advisory is a must for anyone looking to make digital assets a part of their long-term portfolio. Check it out here.

His tech advisory Alpha Tech Trader aims to identify and latch onto strong emerging opportunities in the tech sector, wherever they are in the world. Get more info here.

By Bill Bonner Editor, Fat Tail Daily

[2 min read]

Dear Reader,

First up: the GDP came in at half what was supposed to be...and inflation was hotter than expected. Bloomberg reports: 

‘US Economy Slows and Inflation Jumps, Damping Soft-Landing Hopes 

‘First-quarter core inflation measure accelerates to 3.7% rate. Gross domestic product increased at a 1.6% annualized rate, below all economists’ forecasts, the government’s initial estimate showed. The economy’s main growth engine — personal spending — rose at a slower-than-forecast 2.5% pace. A wider trade deficit subtracted the most from growth since 2022.’  

And here we see the inflate or die trap clearly. The Fed wants to cut rates. Banks want lower rates. Wall Street wants lower rates. The US government desperately needs lower rates. 

But inflation is looking over the Fed’s shoulder. At 3.7%, it’s nearly twice the Fed’s target. So, a cut would likely cost the Fed its remaining credibility...signal higher levels of inflation in the future...and might send the bond market into a tizzy, making it even harder for the feds to roll over their $34 trillion in debt and fund trillions more in new deficits. 

The US growth rate is barely a third of Russia’s GDP growth. But if the Fed cuts rates to try to boost GDP, it risks bringing on higher levels of inflation and a collapse of the bond market...forcing it to ‘print’ more money to cover the feds’ deficits. 

Death of the Bubble

If it doesn’t cut rates, it risks a recession/depression of unknowable severity...and the death of the bubble economy that its ultra-low interest rates, 2009-2021, created. 

Inflate or die. Our high confidence guess is that it will die a little...doing nothing until the pain of a dying bubble becomes unbearable. 

In earlier editions of this commentary, we’ve seen that climbing down the debt mountain, more or less safely, is possible. Jamaica did it. Greece seems to be doing it. Argentina has begun to do it.  

But you only do it by cutting spending...sharply. Emphatically. Enough to run a surplus that you use to reduce your debt.  

As Javier Milei puts it: a balanced budget is ‘non-negotiable’.  

Which makes the $95 billion in ‘foreign aid’ — to people who don’t need it (Israel)...can’t achieve anything with it (the Ukraine)...or have no real use for it (Taiwan) — even more out-of-line.  

George Will claims that opposing the ‘foreign aid’ package is ‘ignoble’. Others say that it ‘promotes US security’. Still others believe it will help ‘protect democracy’, somehow.  

Whether those things are true or not...we have no idea. They are not the sort of claims that can be fact checked.  

Wages of Debt

The contrary point of view is that the wages of this spending will be starkly negative. Americans will be blamed for the slaughter of the innocents in Gaza. In the Ukraine, Americans will be blamed by some for not giving the Ukrainians enough firepower to win...and by others for promoting a losing war with hundreds of thousands of casualties. And in Asia, America will cut itself off from friendly trade with the most innovative and productive economy on the planet. Instead of gaining the benefits of win-win trade with China, the US will reap the bitter costs of win-lose rivalry. 

Whichever point of view you choose, what is indisputable is that in the US as in Argentina ‘no hay dinero’ (there is no money). So, the $95 billion will have to be borrowed. US debt will increase...and the Primary Trend towards lower real asset prices, higher interest rates, higher levels of inflation, and spreading poverty will be enhanced. 

The patterns of Megapolitics also suggest — but leave much room for interpretation and argument — that this sort of excess spending and meddling in the affairs of others will grease the skids for the decline of the US empire. Fish gotta swim.  Birds gotta fly.  And empires gotta decline. As if guided by an invisible hand, the feds do what they have to do...when they have to do it…wrecking America’s financial position, undermining its moral position, and ultimately destroying its position as the world's leading hegemon. 

But tomorrow we’ll look back at Francis Fukuyama...the reprise of history...and what might replace the post-WWII order. The humans in it will be every bit as dumb as those who run things today. But maybe...a different kind of dumb. 

Stay tuned.  

Regards,

Bill Bonner,
For Fat Tail Daily