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How the Rising Dollar Could Trigger the Next Global Financial Crisis

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Posted by John Mauldin - Outside the Box

on Friday, 12 December 2014 10:43

This week’s Outside the Box continues with a theme that I and my colleague Worth Wray have been hammering on for some time: the very real potential for a rising dollar to trigger the next global financial crisis.

We are concerned about the consequences of multi-speed economic growth around the world and the growing divergence between major central banks. In our opinion, if these trends persist, they likely mean (1) a major US dollar rally, (2) a rapid unwind of QE-induced capital flows to emerging markets, (3) a hard slide in fragile emerging-market and commodity-exporter currencies, and (4) financial shocks capable of ushering in a new global financial crisis.

Alongside true macro legends like Kyle Bass, Raoul Pal, Luigi Buttiglione, and Raghuram Rajan, Worth and I have written about this theme extensively in 2014 (“Central Banker Throwdown,” “Every Central Bank for Itself,” “The Cost of Code Red,” “Sea Change,” “A Scary Story for Emerging Markets”). Now it’s quickly becoming a mainstream macro theme on almost everyone’s radar. Virtually every economist and investment strategist on Wall Street has a view on the US dollar and the QE-induced carry trade into emerging markets… and anyone who doesn’t should start looking for a different job.

Policy divergence is really the only macro theme that matters right now. And on that note, the Bank for International Settlements just released its predictably must-read quarterly review, with an urgent warning:

The appreciation of the dollar against the backdrop of divergent monetary policies may, if persistent, have a profound impact on EMEs [emerging-market economies]. For example, it may expose financial vulnerabilities as many firms in emerging markets have large US dollar-denominated liabilities. A continued depreciation of the domestic currency against the dollar could reduce the credit worthiness of many firms, potentially inducing a tightening of financial conditions.

Echoing those comments on Twitter, the “bank for central banks” reiterated how this trend affects all of us (feel free to follow us at @JohnFMauldin and @WorthWray):

@BIS_org: US dollar as global unit of account in debt contracts means a stronger dollar constitutes tightening of global financial conditions.

This is in spite of continued efforts by central banks to ease monetary conditions. Calling attention to that very risk in our Halloween edition of Thoughts from the Frontline, Worth explained that the catalysts are already in position to spark a collapse in a number of fragile emerging markets if the dollar moves even modestly higher (into the low 90s on the DXY Index); but we have struggled to quantify the actual size of the nebulous USD-backed carry trade that could now come unwound at any moment.

Reasonable estimates range from $2 trillion to $5 trillion. The true number could be even larger if more speculative money has slipped through the cracks than has been officially reported in places like China; or it could be smaller if a significant portion of recent inflows represents a more permanent deepening of emerging-market financial systems rather than an attempt to escape financial repression in the developed world. It’s hard to know for sure, and that’s why this week’s Outside the Box is so important.

In a recent presentation at the Brookings Institution, BIS Head of Research and Princeton University Professor Hyun Song Shin shared his research revealing that dollar-denominated credit to non-bank offshore borrowers is now more than $9 TRILLION and at serious risk in the event of continued policy divergence.

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Asset protection

The 10th Man: When the Market Moves Fast, Stuff Blows Up

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Posted by Jared Dillian - Mauldin Economics

on Thursday, 11 December 2014 12:45

shapeimage 22One of my old rules of trading is that whenever a major asset class, index, or other benchmark has a sudden, rapid move in price, something blows up. Sky high. (related by John Mauldin - How the Rising Dollar Could Trigger the Next Global Financial Crisis - Editor Money Talks)

That’s because people get used to regimes. They get used to a certain state of affairs with a lack of volatility. They become complacent. Maybe they stop hedging. Maybe they allow themselves to have unbounded downside risk. Maybe they start gambling.

In the last month, we’ve seen massive moves in the dollar and oil—and I assure you, someone is going to get hurt.

So far I haven’t said anything controversial. Energy companies are going to get hurt by lower oil prices. Exporters are going to get hurt by a rising dollar. A chimpanzee could figure this out.

But there are second-order effects. People are starting to figure out that Canadian banks are going to get hurt by the lack of investment banking business from the energy sector, and the stocks are getting punished.



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Asset protection

7 Questions Gold Bears Must Answer

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Posted by Jeff Clark, Senior Precious Metals Analyst

on Tuesday, 09 December 2014 08:26

A glance at any gold price chart reveals the severity of the bear mauling it has endured over the last three years.

More alarming, even for die-hard gold investors, is that some of the fundamental drivers that would normally push gold higher, like a weak US dollar, have reversed.

Throw in a correction-defying Wall Street stock market and the never-ending rain of disdain for gold from the mainstream and it may seem that there’s no reason to buy gold; the bear is here to stay.

If so, then I have a question. Actually, a whole bunch of questions.

If we’re in a bear market, then…

Why Is China Accumulating Record Amounts of Gold?

Mainstream reports will tell you Chinese imports through Hong Kong are down. They are.

But total gold imports are up. Most journalists continue to overlook the fact that China imports gold directly into Beijing and Shanghai now. And there are at least 12 importing banks—that we know of.

Counting these “unreported” sources, imports have risen sharply. How do we know? From other countries’ export data. Take Switzerland, for example:

ChineseGoldImportsfromSwitzerlandSoar

So far in 2014, Switzerland has shipped 153 tonnes (4.9 million ounces) to China directly. This represents over



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Asset protection

NWO Gangs Pushing The World To The Brink

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Posted by Robert Fitzwilson of The Portola Group via King World News

on Monday, 08 December 2014 16:10

shapeimage 22On the heels of continued chaos around the globe and with many stock markets hitting new highs, today a 40-year market veteran sent King World News a powerful piece discussing the fact that the New World Order “gangs” are now pushing the world to the brink.  Below is what Robert Fitzwilson, founder of The Portola Group, had to say in this exclusive piece for King World News.

Continue reading the Robert Fitzwilson piece HERE



Asset protection

Marc Faber: I Am My Own Central Banker

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Posted by Marc Faber: The Gloom, Boom & Doom Report

on Thursday, 04 December 2014 05:34

UnknownEveryone always says, I want to buy low and I want to sell high. So I think for me, of course I own a lot of gold, and I need to buy more to keep asset allocation between 25% in Real Estate, 25% in equities, 25% cash and bonds, and 25% gold. I need to buy more. So for me this is a very happy event. I don't like to buy gold at $1,900 like in 2011. I like to buy it here or lower.

Gold Broker: Do you think it will break under $1,000 like some people say?

Marc Faber: Look. The forecasting record of people is horrible, in particular, the forecasting record of the Federal Reserve. So, I don't know, maybe it will go below $1,000 but my sense is that it will not stay below $1,000. .... I would use the current weakness as a buying opportunity. ... I'm telling everybody, you as an investor, and me as an investor, we cannot trust the government. ... I am my own central banker. I keep my own physical gold. I do not trust anyone of these (unprintable word).

...the above posted on Marc's website Dec 4th. The following on Dec 3rd & Dec 2nd. 

In Europe we have a flat inaudible Economy

Fed Monetary Policy Will Destroy World‬‬ 

 



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